Cleveland State Law Review Cleveland State Law Review Volume 30 Issue 3 Article 8 1981 Adjusting the Equities in Franchise Termination: A Sui Generis Adjusting the Equities in Franchise Termination: A Sui Generis Approach Approach Richard A. Greco Jr. Follow this and additional works at: https://engagedscholarship.csuohio.edu/clevstlrev Part of the Business Organizations Law Commons, and the Contracts Commons How does access to this work benefit you? Let us know! How does access to this work benefit you? Let us know! Recommended Citation Recommended Citation Note, Adjusting the Equities in Franchise Termination: A Sui Generis Approach, 30 Clev. St. L. Rev. 523 (1981) This Note is brought to you for free and open access by the Journals at EngagedScholarship@CSU. It has been accepted for inclusion in Cleveland State Law Review by an authorized editor of EngagedScholarship@CSU. For more information, please contact [email protected].
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Cleveland State Law Review Cleveland State Law Review
Volume 30 Issue 3 Article 8
1981
Adjusting the Equities in Franchise Termination: A Sui Generis Adjusting the Equities in Franchise Termination: A Sui Generis
Approach Approach
Richard A. Greco Jr.
Follow this and additional works at: https://engagedscholarship.csuohio.edu/clevstlrev
Part of the Business Organizations Law Commons, and the Contracts Commons
How does access to this work benefit you? Let us know! How does access to this work benefit you? Let us know!
Recommended Citation Recommended Citation Note, Adjusting the Equities in Franchise Termination: A Sui Generis Approach, 30 Clev. St. L. Rev. 523 (1981)
This Note is brought to you for free and open access by the Journals at EngagedScholarship@CSU. It has been accepted for inclusion in Cleveland State Law Review by an authorized editor of EngagedScholarship@CSU. For more information, please contact [email protected].
ADJUSTING THE EQUITIES IN FRANCHISETERMINATION: A Sui Generis APPROACH
I. INTRODUCTION
A. An Overview: Why Franchise?N THE DECADES FOLLOWING WORLD WAR II, a method of marketingservices and products developed which is unique unto itself. Fran-
chising began as an alternative to the chain store method of operating abusiness. Franchises retained many of the advantages of chain stores,while doing away with chain stores' chief drawbacks. Similar to a chainstore, the franchise outlet sells a publicly recognizable product througha standardized system. Economies of scale remain present, allowing thedistribution of advertising, design and even bookkeeping and accountingcosts among the members of the system, thus reducing the cost to each.Yet unlike the chain store, the parent company does not have to providethe large amounts of start-up capital which are necessary to establish achain outlet. In addition, each outlet is managed by an individual with avested financial interest in the success of his operation.1
Franchising as a marketing concept has grown into a way of life forAmericans. Virtually every product and service offered to consumershas been franchised. The list includes products and services as diverseas art galleries, employment agencies and wig salons.' The food industryalone has been deluged with franchised products. No fewer than thirtycompanies licensed their method to sell hamburgers.' Over 492,000 fran-chised outlets now exist, accounting for nearly three hundred billiondollars in annual sales.4
This overwhelming acceptance of the franchising concept as amarketing method has not spared the industry of its share of problems.Indeed, the scope of troubled areas in the franchising industry is nearlyas broad as the variety of goods and services available through fran-chised systems. This Note cannot attempt even an overview of all theproblems that confront the industry;5 instead the discussion will focuson one recurring problem within the industry: the rights of the parties
See Hearings Before the Subcommittee on Antitrust and Monopoly of theSenate Committee on the Judiciary, 89th Cong., 1st Sess. 8 (1965).
' Info Press, Inc. collects a complete list of products and services listing themby product and manufacturer together with other relevant information annuallyin THE FRANCHISE ANNUAL.
8 INFO PRESS, INC., THE 1981 FRANCHISE ANNUAL HANDBOOK AND DIRECTORY30-50 (1981).
1 U.S. DEPT. OF COMMERCE, INDUSTRY AND TRADE ADMINISTRATION, FRAN-CHISING IN THE ECONOMY 1977-79 (1979).
' For an excellent general review of the pros and cons of the franchisemethod of doing business, see H. KURSH, THE FRANCHISE BOOM (2d ed. 1968).
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engaged in a franchise relation following the termination of that rela-tionship.
B. The Problem
Much litigation has ensued in recent years over this very issue. Fran-chisors claim the termination of a franchise contract means the fran-chisee has no claim against the franchisor whatsoever for damages ofany kind. Franchisees maintain that the relationship creates rightsbeyond the contract, that termination is an infringement of these rightsand that damages should be available for this infringement. The courtshave tried valiantly to walk a thin line, balancing on one hand freedomand sanctity of contract, and on the other, good faith and fair play. Theresults, as might be imagined, are far from consistent.'
The onslaught of lawsuits in this area has not gone unnoticed bylegislatures. Almost every state has made at least one attempt atregulating the franchise method of doing business.' In short, all agreethat termination of the franchisor-franchisee relationship remains aproblem, but as yet no effective cure has been devised.
C. The Relationship
This stunning lack of success has been based, at least in part, on thefailure of parties to a franchise agreement to agree on even the mostbasic elements of the relationship, including the definition of what con-stitutes a franchise. "In its simplest form, franchising involves a com-pany with a product or service which arranges for a group of dealers tohandle its distribution."8 This definition does not aptly describe the
dynamic nature of the arrangement. The International FranchiseAssociation has defined franchising as "a continuing relationship inwhich the franchisor provides a licensed privilege to do business, plus
assistance in organizing, training, merchandising and management inreturn for a consideration from the franchisee."9 Of the commentators,
I A full discussion of the judicial response is contained in the text accompany-
ing notes 24-90 infra.I Alabama and Alaska are the only states that have yet to adopt franchise
legislation in some form. See notes 91-187 infra and accompanying text.8 E. LEWIS & R. HANCOCK, THE FRANCHISE SYSTEM OF DISTRIBUTION 1 (1963).
9 U.S. DEPT. OF COMMERCE, FRANCHISE COMPANY DATA FOR EQUAL OPPOR-
TUNITY IN BUSINESS (July, 1969, p.VIII). The legislative draftsmen have chosen tobe less generic for the most part. Many franchise practices acts limit their scopeto a single type of franchise. See, e.g., Automobile Dealers' Day in Court Act, 15U.S.C. §§ 1221 et seq. (1976) (franchise is the written agreement between anautomobile dealer and manufacturer which outlines the rights and liabilities ofthe parties thereto); Petroleum Marketing Practices Act, 15 U.S.C.A. §§ 2801 etseq. (West Supp. 1980) (franchise is the contract which authorizes a retailer to oc-cupy leased premises for the sale of motor fuel under a trademark). An accepted
the courts, the legislatures and industry groups considering the ques-tion, nearly all agree that any definition must include some descriptionof the ongoing nature of the arrangement." The license is also an in-tegral part of all franchise relationships." It is these two features thatset a franchise apart from a simple sales contract. The trouble arisesnot on the parties' acceptance of the terms which define the relation-ship, but on the differing focus that the parties give to the conceptsbehind the terms.
For the franchisor, the center of the agreement is the license of thetrademark. His stated contention is that protection of the trademarkmeans that the license must remain very nearly revocable at will.'" Thegrantor maintains that the words "continuing relationship" describe thecontrol that must be maintained over the system as a whole. That is, theuniformity of the operation systemwide cannot be compromised. To ac-complish this the license must remain revocable. In this manner thefranchisor can weed out the undesirable or nonconforming dealers. 4
To the franchisee, the licensed trademark is but a single piece of whatwas sold as an integrated system. The contention that a franchise ismore than the grant of the right to use the franchisor's trademark andsecret formulas is well founded.' 5 From the parties' first association,
definition of franchising has proven elusive. "The word 'franchise' has been ap-plied so indiscriminately, and to such divergent business arrangements as to defyconsistent definition." Wilson, An Emerging Enforcement Policy for Franchising,15 N.Y.L. FORUM 1, 2 (1969).
10 See, e.g., J. MCCORD & I. COHEN, FRANCHISING: LEGAL PROBLEMS AND THEBUSINESS FRAMEWORK OF REFERENCE, AN OVERVIEW (1968); E. LEWIS & R. HAN-COCK, THE FRANCHISE SYSTEM OF DISTRIBUTION 8-9 (1963); Brown, Franchising-AFiduciary Relationship, 49 TEX. L. REV. 650, 660 (1971). Some courts, however,continue to look past this continuing relationship and view the parties' arrange-ment as simply a series of executory contracts. E.g., American Oil Company v.Columbia Oil Co., Inc., 88 Wash. 2d 835, 567 P.2d 637 (1977) (sales contract coupl-ed with the license of a trademark held not to be a franchise relation as no ex-press contract provision required payment of a franchise fee).
" See generally H. BROWN, FRANCHISING: REALITIES AND REMEDIES 13-21(1978).
12 Gelhorn, Limitations on Contract Termination Rights-Franchise Cancella-tions, 1967 DUKE L.J. 465, 469.
13 Indeed, the Lanham Act, 15 U.S.C. §§ 1051 et seq. (1976), requires a licensorof a trademark to insure the quality standards of his mark or risk losing therights to it altogether.
" Adolph Coors Co. v. FTC, 497 F.2d 1178, 1183 (1974)."6 Various types of franchise arrangements exist. In a distributor type fran-
chise, the licensee is merely granted the right to market the parent company'sproduct, usually from a preexisting licensee-owned facility. The most common ex-ample is the beer distributorship. In a "package" franchise, the franchisor pro-vides the plans and methods to do business, and the franchisee provides thecapital to build the outlet and start the business. In a "turnkey" operation thelicensor provides a completely assembled business to the franchisee. He simply
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heavy emphasis is placed on the franchisor's business skill and know-how." The typical advertisement 17 offers the franchisee the chance toown his own business. Location, training, continuing support and adver-tising are all provided by the franchisor. The ad normally goes on tostate that no experience in the field is needed; merely the desire toserve the public, the talent to manage your own business and minimalcash investment are necessary. It is against this background that therelationship begins.
D. The Franchise Contract
In the typical franchise situation prevalent today, a contract is signedwhich purports to define the rights of the parties.18 However, the sheereconomic size of the franchisor 9 and his stated desire to keep thesystem uniform means that few, if any, of the terms are negotiable.20
The contract dictates the scope of the trademark license and what con-trol the franchisor retains in the product.2 This contract also defines theright of the licensor to revoke or terminate the license. By contrast,very little if anything is included in the contract relating to the parties'rights following termination.'
Failure to end the relationship amicably has been the cause of an in-creasing amount of recent franchise litigation. The franchisee cries foul
pays the price, turns the key to open the door and begins business. Common ex-amples of these latter two types are fast-food and gasoline service station fran-chises.
18 United States v. Arnold, Schwinn & Co., 388 U.S. 365, 386 (1967).17 "A Real Opportunity! - -with over 100 franchise centers throughout the
United States, now has excellent locations available in the Cleveland area for in-dividuals who realize the tremendous potential of the--industry. (NoMechanical Experience Necessary).- -provides: 1. A guaranteed location; 2.Complete home office training; 3. Continuing operations support; 4. Effectiveadvertising; 5. Excellent territorial protection. You provide: 1. The desire toserve the public; 2. The talent to manage your own business; 3. Cash and assetsof $30,000 (total investment - $61,465). If you have strong desire to acheive finan-cial independence, don't miss this opportunity of your life-time. For furtherdetails, call .. " The Plain Dealer, Feb. 1, 1981, § F at 27, col. 4.
" See Bailey, A Form Unit Franchise Agreement, 1980 ARIZ. ST. L.J. 585, fora sample franchise contract.
1 See Atlantic Refining Co. v. FTC, 381 U.S. 357, reh. denied, 382 U.S. 873(1965); see also FTC v. Texaco, Inc., 393 U.S. 223 (1968).
See generally Wilson, Freedom of Contract and Adhesion Contracts, 14INT'L & COMP. L.Q. 172 (1965).
21 Retention of too much control means being subject to antitrust violationsunder the Sherman Anti-Trust Act, 15 U.S.C. §§ 1 et seq. (1976), while too littlecontrol means loss of the trademark under the Lanham Act, 15 U.S.C. §§ 1055 etseq. (1976).
22 H. KURSH, THE FRANCHISE BOOM 106 (1968). See also 5 CORBIN, CONTRACTS§ 1058 (1960): "When parties are making a contract, their attention is centered onthe performances that are promised .. " Id. at 939.
and sues to enjoin the termination. The parent then points to the con-tract and turns to other matters." The courts have been reluctant tosettle the disputes absent some legislative assistance. A short examina-tion of the history of the problem bears this out.
II. COMMON LAW RESPONSE
A. Franchising's Beginnings
In the early days of franchising" the grantor-franchisor retained theunilateral right to revoke the license at will.25 The contracts included noexpress provision regarding termination in most cases. In E.I. DuPontDeNemours and Company v. Claiborne-Reno Company,' the court of ap-peals was called on to interpret a written contract of indefiniteduration. 7 Reversing a jury verdict, the court held the termination-at-will clause was not actionable regardless of whether DuPont's motiveswere in good or bad faith. 8
Other courts, recognizing the potential for abuse in such situations,began developing a number of approaches to the termination problem.Among these was the implication of a reasonable duration term into acontract of otherwise indefinite duration." In Allied Equipment Co. v.
2 See, e.g., Ted's Tire Service, Inc. v. Chevron U.S.A., Inc., 470 F. Supp. 163(D. Conn. 1979); Diehl & Sons, Inc. v. International Harvester Co., 445 F. Supp.282 (E.D.N.Y. 1978); Chinetti-Garthwaite Imports, Inc. v. Ferrari Societa PerAnzioni Esercizio Fabriche Automobili E Corse, 463 F. Supp. 73 (E.D. Pa. 1978);Paul Reilly Co., Inc. v. Dynaforce Corp., 449 F. Supp. 1033 (E.D. Wis. 1978); Dayanv. McDonald's Corp., 21 Ill. 2d 761, 382 N.E.2d 55 (1978); Finlay & Associates,Inc. v. Borg-Warner Corp., 155 N.J. Super. 331, 382 A.2d 933 (1978).
The relationship was contractually termed a distributorship. It contained,however, all of the elements of a franchise. A trademark product was licensed tobe sold in a more or less exclusive territory with the licensee paying a royalty forthe privilege of his exclusivity.
Today the exclusive territory may raise some antitrust problems. Seegenerally Continental TV, Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977); UnitedStates v. Arnold-Schwinn & Co., 388 U.S. 365 (1967).
1 E.I. DuPont De Nemours & Co. v. Claiborne-Reno Co., 64 F.2d 224 (8th Cir.),cert. denied, 290 U.S. 646 (1933); Schnerb v. Caterpillar Tractor Co., 43 F.2d 920(2d Cir.), cert. denied, 282 U.S. 898 (1930); Biber Bros. News Co. v. New YorkEvening Post, Inc., 144 Misc. 405, 258 N.Y.S. 31 (Sup. Ct. 1932).
" 64 F.2d 224 (8th Cir.), cert. denied, 290 U.S. 646 (1933).2 The contract stated that it was "(Dupont's] intention and desire to continue
under this agreement so long as [Claiborne-Reno's] services, in [Dupont's] judg-ment, prove satisfactory." Id at 225.
Weber Engineered Products, Inc., the court held that an oraldistributorship contract was not terminable at will where the franchiseespent large amounts of money to build up the franchise in reliance onthe franchisor's promise of a continuing relationship."0 The courtordered the parties to continue the relationship "for such a period oftime as would enable it [Allied] to recoup [the expense which] it incurredin reliance upon the arrangement."'" The California Supreme Court inSan Francisco Brewing Corp. v. Bowman" went a step further, holdingthat an oral contract, impliedly running for a reasonable time, does notbecome terminable at will as soon as a profit is made. This fact was heldto be but one element for the jury to consider."
Along with the implied term of reasonable duration, courts soonbegan to require a reasonable notice before allowing termination ofdistributorship-franchise contracts.34 In J.C. Millett Co. v. Park &Tilford Distillers Corp.,' the court, applying California law, stated thatthe circumstances surrounding a liquor wholesaler's distributorshipwere such that one year was the minimum reasonable time which itmust remain in effect and three months was a concurrently reasonableperiod required for notice of termination.36 The New York Court of Ap-peals in Colony Liquor Distributors, Inc. v. Jack Daniels Distillery-LemMotlow Properties, Inc.," held that the twelve year relationship be-tween the parties and other facts necessitated the addition of areasonable period of notice before termination. It fixed the notice periodat twenty months. 8
I Allied Equipment Co. v. Weber Engineered Products, Inc., 237 F.2d 879,881-82 (4th Cir. 1956). This was an extension of the "Missouri doctrine," an agencylaw concept so named as a result of its apparent origin in Glover v. Henderson,120 Mo. 367, 377, 25 S.W. 175, 177 (1894).
Id at 615, 343 P.2d at 5.See generally J.C. Millett Co. v. Park & Tilford Distillers Corp., 123 F.
Supp. 484 (N.D. Cal. 1954); Des Moines Blue Ribbon Distributors, Inc. v. DrewrysLtd., U.S.A., Inc., 256 Iowa 899, 129 N.W.2d 731 (1964); Colony LiquorDistributors, Inc., v. Jack Daniels Distillery-Lem Motlow Prop., Inc., 22 A.D.2d247, 254 N.Y.S.2d 547 (1965).
123 F. Supp. 484 (N.D. Cal. 1954).36 Id at 493.
22 A.D.2d 247, 254 N.Y.S.2d 547 (1965).Id at 250, 254 N.Y.S.2d at 550. These victories for the franchisees were far
from universal. Many courts continued to enforce contracts between similar par-ties to the letter. See Robert Porter & Sons, Inc. v. National Distillers ProductsCo., 324 F.2d 202 (10th Cir. 1963); Burger Brewing Co. v. Summer, 261 F.2d 261(4th Cir. 1958); Gunter Bros., Inc. v. Cooper Tire & Rubber Co., 87 Ga. App. 626,
As implied terms of duration and notice were added by the courts,draftsmen for the franchisors began to counter by including expressrights of termination in the contract.39 These express terms in the con-tract were strictly construed in favor of the drafters. The courts there-after continually held that so long as the terms of the provision werecomplied with, the parties were without cause to complain.
B. Developing Principles of Franchise Law
The power to terminate is often conditioned on the occurrence of aspecified event, such as failure to meet a sales quota. As long as the con-dition or quota is reasonable, the courts have been reluctant to look anyfurther than to the contract itself. ' This is the so-called freedom of con-tract approach.42 The marketplace, not the courtroom, is the place thatwill correct any inequity in bargaining power; this is assumed to be sosince the parties remain free to choose with whom they will deal.4"
74 S.E.2d 744 (1953); Goodman v. Motor Products Corp., 9 Ill. App. 2d 57, 132N.E.2d 336 (1956).
Reasonable notice appears to have been the more broadly based of the earlyremedies applied by the courts. See, e.g., Florida-Georgia Chemical Co. v. Na-tional Laboratories, Inc., 153 So. 2d 752 (Fla. App. 1963); Mayflower Air-Conditioners, Inc. v. West Coast Heating Supply, Inc., 54 Wash. 2d 211, 339 P.2d89 (1959); California Wine Assoc. v. Wisconsin Liquor Co., 20 Wis. 2d 110, 121N.W.2d 308 (1963).
Compare E.I. DuPont De Nemours & Co. v. Claiborne-Reno Co., 64 F.2d224, 225-26 (8th Cir. 1933) with Superior Motors, Inc. v. Winnebago Industries,Inc., 359 F. Supp. 773, 775 (D.S.C. 1973).
4 See generally Rea v. Ford Motor Co., 497 F.2d 577 (3rd Cir.), cert. denied,419 U.S. 868 (1974); Yamaha Parts Distributors, Inc., v. Ehrman, 316 So. 2d 557(Fla. 1975); Cycleway, Inc. v. Kawasaki Motors Corp., U.S.A., 77 Misc. 2d 829, 354N.Y.S.2d 812 (Sup. Ct. 1974); Division of Triple T Service, Inc. v. Mobil Oil Corp.,60 Misc. 2d 720, 304 N.Y.S.2d 191 (Sup. Ct. 1969).
41 See Frank Chevrolet Co. v. General Motors Corp., 419 F.2d 1054 (6th Cir.1969); Victory Motors of Savannah, Inc. v. Chrysler Motors Corp., 357 F.2d 429(5th Cir. 1966) (quotas figured on national or regional average held to bereasonable term for cancellation). But cf. Madsen v. Chrysler Corp., 261 F. Supp.488 (N.D. Ill. 1966), vacated as moot, 375 F.2d 773 (7th Cir. 1967) (sales quotaviewed by manufacturer as performance goal rather than contractual conditionand therefore not good cause for termination).
Quotas determined with reference to national averages raise serious ques-tions of their own about fairness. For instance, in any average half of thestatistical sample will be below average and half above. In effect, this grants themanufacturer the right to dismiss half of its dealer force at any time.
42 Sir George Jessel is credited with the most famous statement of this view:"[Mien of full age and competent understanding shall have the utmost liberty ofcontracting, and that their contracts when entered into freely and voluntarilyshall be held sacred and shall be enforced by Courts of Justice.... [Ylou are notlightly to interfere with this freedom of contract." Printing & NumericalRegistering Co. v. Sampson, 19 L.R.Eq. 462, 465 (1875).
'3 See Kessler, Contracts of Adhesion-Some Thoughts About Freedom ofContract, 43 COLUM. L. REv. 629, 630-31 (1943).
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In the franchise situation, however, the parties' relationship extendsbeyond the contract. Principles of contract or agency law do not takeinto account the full nature of the ongoing relationship." Without astrong network of viable dealerships, the franchisor's trademark isworth little more than its development cost."5 By contrast, as the systemexpands and the mark becomes widely known, the licensor-franchisor isable to command a premium for its license."
The franchisee sees the system as a method for providing easy accessto a national advertising campaign, and the economies of scale inherentin a large corporation are presumably available to the franchisee. "Thefranchise method of operation has the advantage, . . . of enablingnumerous groups of individuals with small capital to become en-trepreneurs. . . .The franchise system creates a class of independentbusinessmen."'47
It should be plain that more exists here than the standard sales agen-cy relationship. From the first encounter, the parties expect more fromeach other than the "best efforts" duty of sales law.4" The franchisor re-quires the distributors to maintain quality standards and uphold itslocal image. The local outlets need the national expertise in training andadvertising along with the uniform product that gives the trademark apublic identity. It is this blend of independent local input and theuniform national or regional character of the product and the systemthat makes franchising unique. 9
C. Modern Approaches to Franchising
Recognition of the fact that franchising was distinct from historicalcontractual principles came slowly to the courts. While recognizing thatthe rights of the parties were supposed to be embodied in the agree-ment, courts have entertained outside evidence concerning the relation-ship beyond the contract.50
" See generally Brown, Franchising-A Fiduciary Relationship, 49 TEX. L.REV. 650 (1971); Gelhorn, Limitations on Contract Termination Rights-Fran-chise Cancellations, 1967 DUKE L.J. 465, 468-71.
' See Gilson, Trademarks: Sine Qua Non of Franchising, 52 CHI. BAR RECORD228 (1971).
46 See generally Collison, Trademarks, The Cornerstone of a FranchisingSystem, 24 SOUTH. L.J. 247, 248 (1970); Wilson, An Emerging Enforcement PolicyFor Franchising, 15 N.Y.L. FORUM 1, 16 (1969).
,7 Susser v. Carvel Corp., 206 F. Supp. 636, 640 (S.D.N.Y. 1962).41 U.C.C. § 2-306(2) (parties in an exclusive sales agency are under duty to use
"best efforts" to promote sales).19 H. KURSH, THE FRANCHISE BOOM 23-51 (2d ed. 1968).' See, e.g., Atlantic Refining Co. v. FTC, 381 U.S. 357, 368 (1965); Mobil Oil
Many courts continued to say, however, that the contract was the par-ties' final deal and that the judiciary was not at liberty to change it inany way. 51 Fairness was not something to be engrafted onto a contractby a court after its making."2 If the contract failed to outline all of theparties' rights, a court could do nothing."
At the opposite end of the spectrum were those judges who imposedvarious types of good faith duties on the parent company. Some courtsremoved the right to terminate the agreement entirely from the fran-chisor in the absence of some substantial failure of the dealer to performhis duties under the contract. 4 The parties had an obligation to continuedealing with each other until one of them exhibited bad faith by failingto perform his duties under the contract. In other words, as long as thedealer did his best, renewal of his contract was assured. These courtscreated a franchise in perpetuity.5
The leading case under this latter approach is Shell Oil Co. v.Marinello.56 In that case the New Jersey Supreme Court held that theterms of the thirteen-year relationship between the parties were notadequately embodied in the written franchise contract. The court wenton to rewrite much of that contract, finally deciding that unlessMarinello failed to comply substantially with the agreement's terms,Shell owed its dealer a new contract.5 7
A middle ground was found by other courts who recognized that afranchise was more than a sales agency, yet not a contract for life. Thecontract was not the final statement of the parties' bargain, yet a rightwas retained in both parties to terminate the relationship. The right toterminate was, however, qualified. These courts attached a duty to ter-minate in good faith. 8 In Zapatha v. Dairy Mart, Inc.,9 the court looked
51 Tarr v. General Electric Co., 441 F. Supp. 40 (W.D. Pa. 1977); Texaco v.A.A. Gold, 78 Misc. 2d 1050, 357 N.Y.S.2d 951 (Sup. Ct. 1974), affd, 358 N.Y.S.2d973 (1975); Mobil Oil Corp. v. Rubenfeld, 48 A.D.2d 428, 370 N.Y.S.2d 943 (1975).
' Tarr v. General Electric Co., 441 F. Supp. 40, 42 (W.D. Pa. 1977) (allegationsof retaliatory termination held to be damnum absque injuria).
I Shell Oil Co. v. Marinello, 63 N.J. 402, 307 A.2d 598 (1973); Mobil Oil Corp.v. Rubenfeld, 72 Misc. 2d 392, 339 N.Y.S.2d 623 (Civ. Ct. 1972).
' Shell Oil v. Marinello, 63 N.J. 402, 307 A.2d 598 (1973); Mobil Oil Corp.v. Rubenfeld, 72 Misc. 2d 392, 339 N.Y.S.2d 623 (Civ. Ct. 1972). See also Fornarisv. Ridge Tool Co., 423 F.2d 563 (1st Cir.), rev'd on other grounds, 400 U.S. 41(1970).
63 N.J. 402, 307 A.2d 598 (1973).s Id. at 410-11, 307 A.2d at 603.
Zapatha v. Dairy Mart, Inc., 408 N.E.2d 1370 (Mass. 1980); Atlantic-Richfield Co. v. Razumic, 480 Pa. 366, 390 A.2d 736 (1978). See also Seegmiller v.Western Men, Inc., 20 Utah 2d 352, 437 P.2d 892 (1968).
51 408 N.E.2d 1370 (Mass. 1980).
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at the written franchise cancellation clause, and viewed that clause inlight of "general duty of good faith and fair dealing.""0 Dairy Mart wasfound to owe its franchisees a duty not to terminate in any manner thatwould be "unfair, deceptive or in bad faith."" In other words, as long asthe parent company was fair in the way it exercised the terminationclause, it was free to terminate the franchise relationship. The Penn-sylvania Supreme Court found a similar duty in Atlantic Richfield Co. v.Razumic,"2 holding that Arco must follow "principles of good faith andcommercial reasonableness"63 when attempting to terminate a dealer.
The courts imposing good faith termination obligations looked at themanner in which the cancellation power was exercised. 4 Where thebreak was for honest reasons,6 5 no judicial intervention was necessary.When the duty to deal in good faith was stressed, the manner in whichthe contract was performed was examined.6
D. Problems in the Modern Approaches
All of the above common law approaches include conceptual problems.The freedom of contract perspective fails to take into account the ongo-ing nature of the franchise relationship. The details of the day-to-dayrelationship between the parties change continually. Many of the termsembodied in the franchise contract recognize this need for change. 7 Forexample, the franchisor almost universally reserves the right to changethe marks identifying the system. This insures that the system as awhole will benefit from any later upgrading done by allowing retroac-tive changes to be made to the existing franchises. 9 Additionally, many
Id at 1379.61 Id. at 1380.62 480 Pa. 336, 390 A.2d 736 (1978).
Id. at 342, 390 A.2d at 743.Zapatha v. Dairy Mart, Inc., 408 N.E.2d 1370, 1376-78 (Mass. 1980); Atlantic-
Richfield Co. v. Razumic, 480 Pa. 366, 390 A.2d 736 (1978).1 Amoco Oil Co. v. Dickson, 389 N.E.2d 406 (Mass. 1979) (fact that return on
investment was less than one percent was valid business reason to cancel, henceno lack of good faith); Witmer v. Exxon Corp., 260 Pa. 537, 394 A.2d 1276 (1978)(failure to agree on increase in rent meant nonrenewal was in good faith). But cf.Milsen Company v. Southland Corp., 454 F.2d 363 (7th Cir. 1971) (refusal to sub-mit to franchisor's price tying policies, allegedly in violation of antitrust laws,not a good faith reason to terminate).
I Shell Oil Co. v. Marinello, 63 N.J. 402, 307 A.2d 598 (1973); Mobil Oil Corp.v. Rubenfeld, 72 Misc. 2d 392, 339 N.Y.S.2d 623 (1972).
67 See note 15 supra and accompanying text.Bailey, A Form Unit Franchise Agreement, 1980 ARIZ. ST. L.J. 585, 597
[hereinafter cited as Bailey]. See also H. BROWN, FRANCHISING: REALITIES &REMEDIES 379 (2d ed. 1978) [hereinafter cited as H. BROWN]; H. KURSH, THE FRAN-CHISE BOOM 384-415 (App. H) (1968).
franchises operate under guidelines set out in the franchise manual. 70
Where this is the case, the right to change the manual is reserved.'Suppliers, quality standards and product lines may all be changed bythe franchisor from time to time. 2 On the other side of the relationship,the franchisee can vary the details of the day-to-day operation of theoutlet upon request. 3 If an agreement cannot be reached, either partymay submit the matter to arbitration. 4
The parties' relationship changes almost constantly. This adaptivity,written into the standard form contract, gives franchise systems theflexibility to remain viable and competitive. To hold that a dynamic rela-tionship like a franchise can be viewed in terms of static contract theoryis to ignore its underlying nature. Often the agreement is on a printedform with little room for negotiation by the parties. This form merelyprovides the outline, or starting point, for the parties' relationship. Therelationship is not static, rather it changes as the needs of both partieschange. As illustrated, the formal writing is just a description of theparties' true agreement. Fixing on the writing alone ignores thisdynamicism.
The mutual dependence of the parties also supports the conclusionthat franchising is a dynamic, changing relationship. Though the fran-chisee may possess capital and the drive to succeed, he looks to theparent company to provide guidance in focusing these assets in theright direction."0 In addition, the dealer needs the franchisor to providethe product or service which makes the system go.
The parent company needs strong outlets to remain viable. While nosingle franchisee makes the system successful, as a group the outletsare the system."6 The dealers as a whole provide exposure for the pro-duct; this exposure in turn makes licenses of the trademarked productmore valuable." In short, both parties depend on each other for theircontinued existence and success.
This interdependence has the effect of transforming the relationship
70 This method is most common in a package type franchise, as where theparent licenses an entire method of doing business. The manual describes thedetails of the method. The package franchise contrasts with the product franchisewhere the franchisee is given the right to distribute the trademarked product.See note 15 supra.
" Bailey, supra note 68, at 593; H. BROWN, supra note 68, at 374-76.7' Bailey, supra note 68, at 593.71 Id. at 595.7 H. BROWN, supra note 68, at 396. See also Bailey, supra note 68, at 616 n.93.71 See note 10 supra and accompanying text.7' Gellhorn, Limitations of Contract Termination Rights-Franchise Cancella-
tions, 1967 DUKE L.J. 465, 473." Without exposure the trademark would be unprotected. The licensor's ex-
clusive rights in the trademark rest on its usage. Lanham Act, 15 U.S.C. §§ 1051et seq. (1976). See also Trademark Cases, 100 U.S. 82 (1879).
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from one solely based in contract into one which recognizes the mutualduties and rights of the parties. No longer do the parties conductbusiness at arm's length; in a sense they become partners or co-venturers, each mutually dependent on the other for survival. 8
Freedom of contract ignores the mutual dependence of the parties onone another, assuming that the day-to-day bargaining was done at arm'slength. 9 A court which merely compares performance to the printedform ignores the changing nature of the agreement and the mutualdependence of the parties.
While freedom of contract does not adequately provide the dynamicframework which is needed to properly view franchising, neither does atheory which removes entirely from one party (the parent company) theright to end the parties' association.0 The ongoing nature of the rela-tionship creates duties beyond the contract. These duties include a dutyto deal with each other honestly and to manage the venture for thebenefit of each party. 1 No duty, however, exists to grant a license inperpetuity. Even fiduciaries with the highest standards for perfor-mance8 2 may withdraw from the relationship. Yet the license inperpetuity remedy seems to be the thrust of the courts which followMarinello principles. 3 Specific performance of the remaining licenseterm, as a modification of the franchise for life approach, is likewise ill-suited in many instances."
Much of the standard franchise contract's requirements are personalin nature, calling for personal satisfaction of the franchisor. 5 Courts
78 See Jirna, Ltd. v. Mister Donut of Canada, Ltd., 3 Ont. 629 (High Court ofJustice 1970) (the character of a franchise relationship is that of co-venturers).See also Brown, Franchising-A Fiduciary Relationship, 49 TEX. L. REV. 650(1971).
1 See generally Dauer, Contracts of Adhesion in the Light of The BargainHypothesis: An Introduction, 5 AKRON L. REV. 1 (1972); Kessler, Contracts ofAdhesion-Some Thoughts About Freedom of Contract, 43 COLUM. L. REV. 629(1943). See also Williston, Freedom of Contract, 6 CORNELL L.Q. 365 (1921).
Shell Oil Co. v. Marinello, 63 N.J. 402, 307 A.2d 598 (1973).81 "Every contract implies good faith and fair dealing between the parties to
it." Simon v. Etgen, 213 A.D. 589, 210 N.Y.S. 816 (1915). See generally 1WILLISTON ON CONTRACTS § 104A, at 409-11 (3d ed. 1957).
82 The standard has been described as "the finest loyalty .... Not honesty
alone, but the punctilio of an honor the most sensitive, is then the standard ofbehavior." Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928).
83 See, e.g., Arnott v. American Oil Co., 609 F.2d 873 (8th Cir. 1979). The courtdid not expressly adopt Marinello, but implied a renewability term into the con-tract. Id.
Several legislatures seem also to have adopted this approach in their at-tempts to provide remedies for franchise terminations. The legislative efforts inthe area are more fully discussed in notes 91-187 infra and accompanying text.
8 What is meant by specific performance is enforcement of the contractthrough to the conclusion of its term.
have been reluctant to specifically enforce such subjective terms in con-tracts, reserving the remedy to cases where performance and satisfac-tion can be easily and objectively measured." Another often-citedreason why the court will not specifically enforce the contract is the dif-ficulty of supervision in such cases, as well as the problem of forcing theparties to continue a distasteful personal relationship." Once the mutualdecision to terminate the franchise relationship has been made, it shouldbe respected by the courts.88 The termination should, however, be car-ried out fairly. Neither side should be permitted to retain more than afair share of the profits from the relationship.
The middle ground under the common law approaches requires goodcause before the parties may terminate." The focus is on the method oftermination rather than the degree to which the subjective performanceterms have been fulfilled." This approach has been adopted by many ofthe legislatures considering the problems in the franchise area anddiscussion of this view is deferred for a review of the recent legislativedevelopments.
III. LEGISLATIVE APPROACHES
Legislative attempts at resolution of the franchise termination prob-lem have been concentrated into three basic areas based on the type offranchise. Motor vehicle franchises have received by far the most atten-tion from legislatures. 1 Gasoline dealerships92 and general franchiselegislation93 comprise the other areas receiving much legislative atten-tion.
The focus of most of the statutory remedial efforts has been the addi-tion of mandatory notice and "good cause" terms to the contracts be-tween the parent and the dealer."' The results of the legislative actionsin the area have been mixed. Certainly, the creation of a statutory causeof action has not lowered the number of cases coming before thecourts. 5 This, however, is consistent with the intent behind most of the
" 1 WILLISTON ON CONTRACTS § 1425, at 824-36 (3d ed. 1957).87 Id § 1444, at 984-86.
But see Semmes Motors, Inc. v. Ford Motor Co., 429 F.2d 1197 (2d Cir. 1970)(damages are inadequate where the franchisee desires to sell cars, not live off ofthe damage award).
89 See note 58 supra.
Zapatha v. Dairy Mart, Inc., 408 N.E.2d 1370 (Mass. 1980).9 See notes 97-187 infra and accompanying text.92 See notes 188-235 infra and accompanying text.
, See notes 236-54 infra and accompanying text.See, e.g., N.J. STAT. ANN. §§ 56:109-1 et seq. (West 1977); MASS. GEN. LAWS
ANN. ch. 93B, §§ 1 et seq. (1975). See also notes 236-48 infra and accompanyingtext.
11 See generally H. BROWN, supra note 68, at 210-37.
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statutes." An examination of the automobile dealers' acts bears out thisconclusion.
A. Automobile Dealer Franchise Acts
Legislation in many states deals specifically with the rights andduties created by the automobile dealer franchise relationship. Addi-tionally, the Automobile Dealer's Day in Court Act97 was enacted in 1956to provide a federal cause of action for aggrieved dealers. 8
1. Automobile Dealer's Day in Court Act99
The Automobile Dealer's Day in Court Act was enacted in order tocorrect the imbalance of bargaining power in the industry between theautomobile manufacturers and their dealers.' 0 Not every grievance,however, was made actionable. To come within the purview of thestatute, the manufacturer must have failed "to act in good faith in per-forming . . . [the] provisions of the franchise, or in terminating [the rela-tionship]..... Sales recommendations and persuasion on the part of thefranchisor were not made actionable. Actual coercion, intimidation orthreats thereof must be shown by the dealer.' °2 The difficulty in meetingthe burden of showing coercion has emaciated the statute's effec-tiveness."'
The courts, when called upon to interpret the Dealer's Day in CourtAct, have continually held that failure to act in good faith meantsomething more than arbitrariness or hard bargaining on the part of themanufacturer."4 Good faith has been strictly construed.' 5 In Berry Bros.
See, e.g., [1956] U.S. CODE CONG. & AD. NEWS 4596.9 15 U.S.C. §§ 1221 et seq. (1976).98 Id. § 1222." 15 U.S.C. §§ 1221 et seq. (1976).11 [1956] U.S. CODE CONG. & AD. NEWS 4596.'0, 15 U.S.C. § 1222 (1956).102 [1956] U.S. CODE CONG. & AD. NEws 4596, 4603.
" Brown, A Bill of Rights for Auto Dealers, 12 B.C. IND. & COM. L. REV. 758,791-92 (1971); Freed, A Study of Dealer's Suits Under the Automobile DealersFranchise Act, 41 U. DET. L.J. 245, 256-61 (1964). See also MaCauley, Changing aContinuing Relationship Between a Large Corporation and Those Who DealWith It: Automobile Manufacturers, Their Deals and the Legal System, 1965WIs. L. REV. 483.
10 Overseas Motors, Inc. v. Import Motors Ltd., Inc., 519 F.2d 119 (6th Cir.),cert. denied, 423 U.S. 987 (1975); Berry Bros. Buick, Inc. v. General Motors Corp.(Buick Motors Division), 257 F. Supp. 542 (E.D. Pa. 1966), aff'd, 377 F.2d 552(1967). See also R.A.C. Motors, Inc. v. World-Wide Volkswagen Corp., 314 F.Supp. 681 (D.N.J. 1970). But cf. Madsen v. Chrysler Corp., 261 F. Supp. 488 (N.D.Ill. 1966) (sales quota held arbitrary and manufacturer breached act when it ter-minated dealer for failure to meet quota).'0 Autohaus Brugger, Inc. v. Saab Motors, Inc., 567 F.2d 901 (9th Cir.), cert.
Buick, Inc. v. General Motors Corp., the court held that while pressur-ing a dealer to take unwanted inventory might be coercive, it was not aper se violation of the statute unless an unreasonable demand was in-cluded with the pressure. '° In order for a dealer to recover under theact, any coercion or intimidation alleged must include wrongful demandswhich, if not complied with, will result in sanctions. Thus, it is necessaryto consider not only whether the manufacturer brought pressures tobear on the dealer, but also his reasons for doing so. ' In addition, theburden of proof is entirely on the terminated dealer."'
Even with the conservative construction given the statute by thecourts, many franchisees have been successful under the new federalcause of action. ' The Automobile Dealer's Day in Court Act accom-plished its purpose: It allowed car dealers a chance to state their case inthe courtroom,' 0 albeit not always successfully. More importantly,however, it blazed the trail for the states to enact their own solution tothe termination problem.
2. State Legislation
As of this writing, forty-two states have enacted specific statutesdirected at the motor vehicle franchise situation."' Though many of the
denied, 436 U.S. 946 (1978); Clifford Jacobs Motors, Inc. v. Chrysler Corp., 357 F.Supp. 564 (S.D. Ohio 1973).
10'6 Berry Bros. Buick, Inc. v. General Motors Corp. (Buick Motor Division), 257F. Supp. 542, 546 (E.D. Pa. 1966), affd, 377 F.2d 552 (1967). This is the type of ac-tion that the statute was enacted to prevent: "[Mlanufacturer pressure .. . upon adealer to accept automobiles ... which the dealer does not need, want, or feel themarket is able to absorb, may ... constitute coercion or intimidation." [1956] U.S.CODE CONG. & AD. NEWS 4596, 4603.
'" Autohaus Brugger, Inc. v. Saab Motors, Inc., 567 F.2d 901 (9th Cir.), cert.denied, 436 U.S. 946 (1978).
" See Overseas Motors, Inc., v. Import Motors, Ltd., Inc., 375 F. Supp. 499(E.D. Mich. 1974), aff'd, 519 F.2d 119 (6th Cir.), cert. denied, 423 U.S. 987 (1975).
"9 See Marquis v. Chrysler Corp., 577 F.2d 624 (9th Cir. 1978); Colonial Ford,Inc. v. Ford Motor Co., 577 F.2d 106 (10th Cir. 1978), reh. denied, 592 F.2d 1126(1979); DeFilippo v. Ford Motor Co., 516 F.2d 1313 (3d Cir.), cert. denied, 423 U.S.912 (1975).
"' [19561 U.S. CODE CONG. & AD. NEWS. 4596.' See ARIZ. REV. STAT. ANN. §§ 28-1301 et seq. (1973); ARK. STAT. ANN.
§§ 75-2301 et seq. (Supp. 1979); CAL. VEH. CODE ANN. §§ 3060 et seq. (West Supp.1979); COLO. REV. STAT. ANN. §§ 12-6-120 et seq. (1977); FLA. STAT. ANN.§§ 320.641 et seq. (West Supp. 1980); GA. CODE ANN. §§ 84-6601 et seq. (Supp.1979); HAWAII REV. STAT. §§ 437-27 et seq. (1976); IDAHO CODE §§ 49-2401 et seq.(Supp.1980); ILL. ANN. STAT. ch. 121'/2, §§ 751 et seq. (Smith-Hurd Supp. 1980);IND. CODE ANN. §§ 9-10-2-3 et seq. (Burns Supp. 1980); IOWA CODE ANN. §§ 322A.1et seq. (West Supp. 1980); KAN. STAT. ANN. §§ 8-2301 et seq. (1975); Ky. REV.STAT. ANN. § 190.010 (Baldwin 1977); LA. REV. STAT. ANN. §§ 32:1251 et seq.(Supp. 1980); ME. REV. STAT. ANN. tit. 10, §§ 1171 et seq. (Supp. 1980); MD.
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state enactments speak in the same general terms as the federalDealer's Day in Court Act, nearly all provide a cause of action for awider scope of infractions.' 2 Termination without cause and due notice,as well as coercion, remain statutory causes of action in all of the af-fected states."3
The states' regulatory schemes adopt essentially two patterns. Thepredominant enforcement mechanism under the state enactments isreview and oversight by an administrative agency".4 or by the attorneygeneral."5 The states which do not follow this pattern have adoptedessentially the structure of the federal system, choosing instead to pro-vide a private cause of action and access directly to the courts."' Underboth schemes, the aggrieved dealer may enjoin the manufacturer's ter-mination decision."1
7
TRANSP. CODE ANN. §§ 15-201 et seq. (1976); MASS. GEN. LAWS ANN. ch. 93B(1975); MICH. STAT. ANN. § 445.521 (Supp. 1980); MISS. CODE ANN. §§ 63-17-51 et seq.(1972); Mo. ANN. STAT. §§ 407.810 et seq. (Vernon Supp. 1980); MONT. REV. CODEANN. § 51-601 (1977); NEB. REV. STAT. §§ 60-1401 et seq. (1979);NEV. REV. STAT.§§482.36311 et seq. (1979); N.H. REV. STAT. ANN. §§ 357-B:1 et seq. (Supp. 1979); N.M.STAT. ANN. §§ 57-16-1 et seq. (1978); N.Y. GEN. Bus. LAW § 197 (McKinney Supp.1980); N.C. GEN. STAT. §§ 20-285 et seq. (1978); N.D. CENT. CODE §§ 51-07-01 etseq. (Supp. 1979); OHIO REV. CODE. ANN. §§ 4517.01 et seq. (Page Supp. 1980);OKLA. STAT. ANN. tit. 47, §§ 561 et seq. (1962); PA. STAT. ANN. tit. 63, §§ 801 etseq. (Purdon 1968); R.I. GEN. LAWS § 31-5.1 (Supp. 1980); S.C. CODE § 56-15-10(1976); S.D. CODIFIED LAWS ANN. §§ 32-6A-1 et seq. (1976); TENN. CODE ANN. §§59-1714 et seq. (Supp. 1980); TEX. REV. Civ. STAT. ANN. art. 4413(36) et seq. (Ver-non 1976); UTAH CODE ANN. § 13-14-1 (Supp. 1979); VT. STAT. ANN. tit. 9, §§ 4071et seq. (Supp. 1980); VA. CODE §§ 46.1-515 et seq. (Supp. 1980); WASH REV. CODEANN. §§ 46.70.005 et seq. (1970); W. VA. CODE §§ 47-17-1 et seq. (Supp. 1980); Wis.STAT. ANN. § 218.01 (West Supp. 1980); WYO. STAT. §§ 40-15-101 et seq. (1977).Delaware, Minnesota, New Jersey and Oregon regulate automobile franchisesthrough their general franchise statutes. See notes 236-54 infra. Only Alabamaand Alaska have no statute regulating the industry.
"' See, e.g., CAL. VEH. CODE ANN. § 3060 (West Supp. 1980); NEB. REV. STAT §
60-1401 (Supp. 1979); OHIO REV. CODE ANN. § 4517.50 (Page Supp. 1980) (fran-chisor must show cause in order to establish new dealership in existing dealer'sterritory). See also ILL. ANN. STAT. ch. 121 /2, § 751 (Smith-Hurd Supp. 1980); N.H.REV. STAT. ANN. § 357-B:1 (Supp. 1979) (establishing cause of action if manufac-turer acts arbitrarily in dealing with franchisee). But cf. MD. TRANSP. CODE ANN.§ 15-201 (1976); ARK. STAT. ANN. § 75-2301 (Supp. 1979) (adopting essentially samelanguage as federal act).
"I See, e.g., CAL. VEH. CODE ANN. §§ 3060 et seq. (West Supp. 1979); NEB.REV. STAT. §§ 60-1401 et seq. (Supp. 1979); N.H. REV. STAT. ANN. §§ 357-B:1 etseq. (Supp. 1979); OHIO REV. CODE ANN. §§ 4517.40 et seq. (Page Supp. 1980).
The initial difference under the two schemes is the burden of proofwhich the terminated dealer must meet in order to stay termination bythe manufacturer. In an agency review system, the cancellation isautomatically enjoined pending a hearing by the motor vehicle board(once a protest to the proposed termination has been filed by thedealer)."8 The judicial review method requires the dealer to plead hiscase before a judge and win a preliminary injuction based on the tradi-tional threshold standards required for equitable injunctive interven-tion." 9
Agency review allows an instant uncontested injunction. The dealermust simply allege a prima facie case and file the protest complaint, andthe manufacturer's decision thereafter is enjoined. By contrast, thedealer under a judicial review system faces a much more difficultcourse. To stay the termination decision, he must prove to a court in anadversary hearing that his chances of success at trial are great enoughto merit retaining the status quo until that time. 2 ' This means that inaddition to alleging a prima facie case of bad faith, he must show thatthe balance of hardships accrue to him and refute any contrary claimmade by the manufacturer to the court. Absent this proof of success, themanufacturer may proceed as planned and cancel the dealership.Though the dealer retains his cause for monetary damages, he has inthe meantime lost his business.'
Because agency review schemes retain the status quo in every caseprior to a hearing on the merits, they come closer to a true balance ofthe equities. The dealer often has little more than his franchise asmeans of support. Failure to win a preliminary injunction under ajudicial review scheme not only means the dealer loses his business, butat the same time, his sole source of monetary support in the face of whatmay be very costly litigation. The agency schemes also settle the actionmuch more quickly than the judicial review approaches. Because thecases are heard before an administrative board with exclusive jurisdic-tion over cases of this nature, they are heard more quickly than if thecases were set on a trial calendar along with all other civil trials.
Several drawbacks can be found with the agency schemes, however.Chief among them is that because of the ease of enjoining the cancella-tion decision, many spurious claims and protests may be filed. That is,although the manufacturer has a valid reason to terminate the dealer,he must, in nearly every case, prove his motives to a third party: the
"o CAL. VEH. CODE ANN. §§ 3060, 3062 (West Supp. 1980).119 N.Y. GEN. Bus. LAW § 197 (McKinney Supp. 1980)."I P.J. Grade, Inc. v. General Motors Corp., 472 F. Supp. 35 (E.D.N.Y. 1979);
Tappan Motors, Inc. v. Volvo of America Corp., 102 Misc. 2d 579, 423 N.Y.S.2d819 (Sup. Ct. 1980).
121 Semmes Motors, Inc. v. Ford Motor Co., 429 F.2d 1197 (2d Cir. 1970).
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responsible agency. The effect is to increase the regulatory burden onthe auto industry as a whole. This, of course, is not without a cost whichfinds its way into the price of the product.
Several constitutional problems are also raised by the preliminary in-junction portions of the agency acts. In New Motor Vehicle Bd. of CaL v.Orrin W. Fox Co.,'22 the Supreme Court held the California act, 23 anagency review statute, valid in light of several constitutional challenges.The manufacturer claimed the automatic grant of a stay pending trialwas a deprivation of due process. The court disagreed, saying in essencethat "[California] may .... require businesses to secure regulatory ap-proval before engaging in specified practices..12' The temporary retentionof the status quo prior to a hearing was not likened to an injunction butrather to a delay that accompanies many licensing processes includingsecurities registration or pharmacy operating permits. The Court alsofound the act to be a valid delegation of legislative authority and to be avalid regulatory scheme under the Sherman Act.
On the whole, the agency review schemes seem to be better pro-cedurally than the judicial review methods. They leave the status quointact until a hearing and at the same time provide for quicker hearingswhile still leaving open the avenue of appeal to the judiciary. 5
The substantive portions of both schemes also differ. Under all of thestate statutory plans, once the dealer makes out a prima facie showingof bad faith, the burden shifts to the franchisor to show good cause toterminate. 2 ' While the procedural shifting of the burden is the sameunder all of the statutes, the statutory guidelines for determining goodcause" differ widely. Most typically, the agency review statute'sguidelines provide for an examination of the circumstances surroundingthe franchise. Such circumstances frequently include the permanancyand amount of a dealer's investment.'28 The adequacy of the service pro-vided to the public by the terminated dealer as compared to othersimilar dealers is also made a factor." In addition, the degree to whichthe dealer has performed the obligations owed to the manufacturer
2 439 U.S. 96 (1979).'2 CAL. VEH. CODE ANN. §§ 3000 et seq. (West Supp. 1979).12 439 U.S. at 108.12 E.g., CAL. VEH. CODE ANN. § 3058 (West Supp. 1979).
Id § 3066(b) (West Supp. 1979).'= "Good cause" is the statutory standard for determining whether or not the
franchisor may terminate the dealer without incurring the wrath of the statutoryremedy schemes. The addition of a cause term to distributorship contracts wasthe most widely applied common law principle in the pre-statute cases. See notes58-66 supra.
" See, e.g., CAL. VEH. CODE ANN. § 3061 (West Supp. 1979).129 Id
under the franchise contract is considered.13 Each of the above factorsis weighed131 and if they balance in favor of the manufacturer, or inother words, if the dealer has failed to live up to his potential, then goodcause is established and the manufacturer may terminate the franchisewith a dealer. In the event that good cause is not found, the dealer mayresort to the statutory remedies.
Under systems of judicial review, good cause is less formally defined.The statutes provide a cause of action that is more broadly based thanthe federal act'32 but most do not define good cause in any but the mostgeneral terms.' At least one judicial review state, however, hasadopted the criteria found in the agency acts for defining good cause.'
The states have, under both types of statutes, moved away from thehard-line federal approach and have come closer to the ideals originallysought by the Automobile Dealer's Day in Court Act.'3' By allowingpreliminary injuctions, by shifting the burden of proof to the franchisorand by liberalizing the definition of good faith, the states have restoredsome balance of power to the industry.
Good cause legislation is not, however, the best solution to the prob-lems facing franchising. Good cause acts simply require the franchisorto have a valid reason before cancelling or failing to renew the dealer'scontract.3 ' All of the statutes require a disinterested party (in some
"I Id. But see MD. TRANSP. CODE ANN. § 15-209(a) (1976). The only criteria
under the Maryland act are that the dealer must have "failed to comply substan-tially with the reasonable requirements" of the contract and been given notice ofthe manufacturer's decision to terminate the franchise. Id. The Maryland-typedefinition opens the door for abuse. Draftsmen for the franchisor can simplywrite into contracts performance clauses which are impossible for the dealers toobtain, thus effectively precluding the statutes' effectiveness. For example, theinstitution of a sales quota system allows a manufacturer the privilege of cancell-ing the contracts of half its dealer force at any time. See note 41 supra.
' ' Some states also require the manufacturer to show that the territory willnot be abandoned. See, e.g., IOWA CODE ANN. § 322A.2.2 (West Supp. 1980); NEB.REV. STAT. § 60-1427 (Supp. 1979). In these states the public welfare is made apart of the weighing process. The balance between the manufacturer and thedealer must favor the manufacturer, as must the balance between the manufac-turer and the public. This unnecessarily harsh requirement for terminating adealer is mitigated only if the manufacturer agrees not to establish any dealer-ship in the area for a specified time period, usually five years. NEB. REV. STAT. §
60-1427 (1978).132 Compare Automobile Dealer's Day in Court Act, 15 U.S.C. § 1222 (1976),
with MASS. GEN. LAWS ANN. ch. 93B, § 4(3)(e) (1981)."3 See MASS. GEN. LAWS ANN. ch. 93B, § 4(3)(c): "It shall be [unlawful] for a
manufacturer . .. to cancel or terminate the franchise .. . of any such dealerwithout good cause." Id.
"4 NEv. REV. STAT. § 482.36311 (1979). The agency acts use the circumstancesdetailed at notes 128-30 supra to determine whether good cause exists.
" See [1956] U.S. CODE CONG. & AD. NEWS 4596, 4603."4 See notes 126-34 supra and accompanying text.
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cases a judge,' 7 and in others an administrative board' 38 ) to examine themotive of the party desiring to terminate the contract. 9 Absence of avalid motive is rarely a problem for the manufacturer-franchisor,however.'4 In Russ Thompson Motors, Inc. v. Chrysler,' failure to meeta sales quota was held to be sufficient good cause to allow terminationAs has been previously pointed out, sales quotas set by reference toaverages give the manufacturer the right to terminate fully half of itsdealer force at any time."2
For the manufacturer, the decision to terminate is often made forpurely business reasons. The franchise's profits or sales may havebecome stagnant"3 or the franchisee may have refused to honorcustomer warranty claims.'" The decision to terminate may sometimesreflect the fact that the franchisor has been offered a higher price forthe location. Without question, the first two decisions constitute goodcause."5 Almost as certainly, the third does not. Yet all stem from thebusiness judgment of the franchisor and all involve a taking of the fran-chisee's right to continue in business. The fact that the statutoryschemes arrive at different results merely underlines the fact that theeffect of the termination is not related to the motive or cause for a ter-mination.
The addition of a good faith motive requirement is often justified onpublic policy grounds."8 The good cause term is added in order toalleviate the effects of a one-sided contract, to benefit the party whose
'37 See, e.g., MASS. GEN. LAWS ANN. ch. 93B, § 4(3) (West Supp. 1981); COLO.REV. STAT. § 12-6-122 (1978); N.Y. GEN. BUS. LAW § 197(a) (McKinney Supp. 1980).
13 CAL. VEH. CODE ANN. § 3000 (West Supp. 1979); OHio REV. CODE ANN.
§ 4517.30 (Page Supp. 1980).'9 CAL. VEH. CODE ANN. § 3060 (West Supp. 1979); MASS. GEN. LAWS ANN. ch.
93B, § 4(3) (West Supp. 1981)."' See Golden Gate Acceptance Corp. v. General Motors Corp., 597 F.2d 676
(9th Cir. 1979) (dealer breached location provision of contract by unilaterallychanging sites and leasing old site to competitor); Russ Thompson Motors, Inc. v.Chrysler Corp., 425 F. Supp. 1218 (D.N.H. 1977) (failure to meet sales quota); Sun-down Imports, Inc. v. Arizona Dep't. of Transp., Motor Vehicle Division, 115 Ariz.428, 565 P.2d 1289 (1977) (acquisition of second dealership concealed by fran-chisee). See also note 151 infra.. 425 F. Supp. 1218 (D.N.H. 1977)."' See note 41 supra."4 Russ Thompson Motors, Inc. v. Chrysler Corp., 425 F. Supp. 1218 (D.N.H.
1977).'" American Motors Sales Corp. v. Semke, 384 F.2d 192 (10th Cir. 1967)."45 Under the good cause criteria outlined at notes 128-31 supra, stagnating
sales or failures to honor warranty claims would mean that the dealer's serviceobligation to both the manufacturer and to the public had not been fulfilled. Thiswould likely tip the scales in favor of the manufacturer.
1,8 Gellhorn, Limitations on Contract Termination Rights-FranchiseCancellations, 1967 DUKE L.J. 465, 504.
bargaining power is relatively inferior.' 7 To presume, however, that byrequiring good motive a harsh bargain will be mitigated makes littleanalytic sense. ' Motives or good cause bear no relation to the effect ofthe termination. The dealer under these circumstances has lost his rightto do business."9 He may retain his facilities, but he has lost the good-will created by a going concern." This loss is unconnected with the fran-chisor's reason for desiring to end the relationship.
Finally, good cause bills do not even attempt to deal with anythingother than terminations without good cause. If all terminations wereplaced onto a spectrum, on one end would be terminations withoutcause. The next step toward the center would be those for a bad faithreason, followed by good cause. Only in the first two types of termina-tions do the statutes even attempt a remedy. Yet in the great multitudeof cases, good cause exists and the dealer is left without any remedy.'5 'He suffers very real losses from the loss of business that he may havespent years developing.
What is needed, then, is a system, statutory or otherwise, whichrecognizes the unique nature of the problem, and approaches it from aconsistent theoretical framework while applying to it a logical remedy.The problem with this approach is how to adjust the equities of the par-ties to a franchise relationship once the decision has been made todiscontinue the relationship. The proper approach must have as its goalthe ultimate dissolution of the relationship.
From the outset, the relationship.is founded upon mutual trust and adesire to work together toward a common goal, namely a net profit. 52
The decision to terminate means that, for whatever reason, at least oneof the parties no longer has that desire. Any approach which ignoresthis crucial fact overlooks the very essence of the franchising relation-ship.
The good cause bills fundamentally represent that cancellation is per-missible in some circumstances, and impermissible in others. From thisbeginning, the rules of the game have been developed; failure to proveto a judge's or administrative board's satisfaction that the facts sur-
147 Id
Id at 505.149 See Semmes Motors, Inc. v. Ford Motor Co., 429 F.2d 1197 (2d Cir. 1970).'50 H. BROWN, supra note 68, at 54-55, 79-80, 88, 93.151 In New Motor Vehicle Bd. of Cal. v. Orrin W. Fox Co., 439 U.S. 96, 110 n.14
(1979), it was noted that of the forty-two protests under the act that made it to ahearing, only one matured into a permanent injunction, which was the exclusiveremedy under the California act. Thus, in forty-one cases, good cause was shown.Id
'52 H. BROWN, supra note 68, at 3-12; H. KURSH, THE FRANCHISE BOOM 22-25 (2ded. 1968).
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rounding a specific cancellation merits its placement in the "for cause"category results in a penalty being applied. 15
The better approach is to allow cancellation in all cases. The partiesshould be free to come and go for whatever they feel are just reasons.The termination process itself should be monitored, however. Thedealer should be compensated for his losses, the most substantial ofwhich is the loss of the right to do business. In other words, if the effectof a disparity in bargaining power confers unreasonable gains upondissolution, then the state should monitor the dissolution to insure thatthose gains are split equally. The existing automobile dealers' statutesfall short of this end, and it is for this reason they leave much room forimprovement and development.
The statutory schemes, of course, are not entirely without merit.They have served to open the eyes of the courts to the problems of theparties.' In addition, the statutes are responsible, to some degree, forstopping the unfair practices of the manufacturers in their dealings withthe franchisees."' But the primary contribution which the automobiledealers' acts have made to the developing law of franchising has been inthe area of remedies. As could be expected, with forty-two states enact-ing regulatory schemes the remedial provisions have been mixed. Thestatutes provide several classes of remedies for breach, includingprivate damages,"' civil and criminal penalties 1 7 and equitable relief."'While the states' regulatory schemes split along two lines, theaforementioned remedies do not fall into neat groups.
A private right of action for damages is the most broadly based of theremedies provided."9 Most states also include as an element the award
15 See Globe Liquor Co. v. Four Roses Distillers Co., 281 A.2d 19 (Del. Sup.Ct.), cert. denied, 404 U.S. 873 (1971).
" Compare E.I. DuPont De Nemours & Co. v. Claiborne-Reno Co., 64 F.2d 224(8th Cir.), cert. denied, 290 U.S. 646 (1933) (contract held to be terminable at will)with Blankenship v. Atlantic-Richfield Co., 478 F. Supp. 1016 (D. Ore. 1979) (con-tract for definite term continues for another term if statute not complied with).
" See generally MaCaulay, Changing a Continuing Relationship Between aLarge Corporation and Those Who Deal With It: Automobile Manufacturers,Their Dealers and the Legal System, 1965 Wis. L. REV. 438; Freed, A Study ofDealers' Suits Under the Automobile Dealers Franchise Act, 41 U. DET. L.J. 245(1964).
- See MASS. GEN. LAWS ANN. ch. 93B, § 12A (West Supp. 1981); MD. TRANSP.CODE ANN. § 15-212 (1977); OHIO REV. CODE ANN. § 4517.65(A) (Page Supp. 1980).
"I See NEV. REV. STAT. § 482.36411 (1979); MD. TRANSP. CODE ANN. § 15-212(1977); HAWAII REV. STAT. §§ 435-36 (1976).
15 See OHIO REV. CODE ANN. § 4517.65(C) (Page Supp. 1980); ILL. STAT. ANN.ch. 1211/2, § 763 (Smith-Hurd Supp. 1980); TEX. REV. CIV. STAT. ANN. art. 4413(36),§ 6.02 (Vernon 1976).
119 E.g., COLO. REV. STAT. § 12-6-122 (1977); ILL. STAT. ANN. ch. 121'/z, § 763(Smith-Hurd Supp. 1980); MASS. GEN. LAWS ANN. ch. 93B, § 12A (West Supp.1981); NEV. REV. STAT. § 482.36411 (1979).
of attorney's fees.' By allowing counsel fees as part of the damageaward if the dealer's claim should prove meritorious, at least oneobstacle facing the franchisee has been removied, ie., the cost of litiga-tion. But proof of actual damages is far from easy and rarely amounts toa great deal of money. With this in mind, some states provide for doubleand treble damages should any statutory violation be found."' At leastone state (Nevada) also provides for the award of punitive damages ifthe violation can be shown to be willful. 162
A better measure of damages in this type of case is the fair marketvalue of the business.'63 The theory behind such an award is that theremedy for the breach is recission, not restitution. 4 This would alsoseem to be in line with the expectation of the parties to the contract.From the franchisee's point of view, all he could have expected from thebusiness was that a source of income would be provided during the fran-chisee's tenure as owner, and then a modest profit upon its eventualsale. Thus, upon cancellation, he would receive exactly what he wouldhave received from a voluntary sale-the fair market value of thebusiness.
For this same reason, punitive damages are inappropriate. In general,punitive damages are reserved to cases where one party has maliciouslyor willfully harmed another. The large damage award serves as a deter-rent against future injuries. In a franchise situation, if every termina-tion required a payment to the franchisee an amount equal to the fairmarket value of the business, there would be no need for the deterrent.Each termination decision would be assessed independently, as itshould, from a strictly business frame of reference. If it is less expen-sive to keep the outlet in operation than to buy out the franchise, thenno termination should ensue. In short, by choosing the fair market valueof the business as the damage measure, franchise terminations would beremoved from the judicial arena and returned to the business sector.
A private cause of action for damages is far from an exclusive remedyunder the states' schemes, however. A number of states have made noprovisions whatsoever for damages, seeking instead to limit the remedy
" See, e.g., NEV. REV. STAT. § 482.36411 (1979); OHIO REV. CODE ANN.§ 4517.65(A) (Page Supp. 1980). Contra, CAL. VEH. CODE ANN. §§ 3060 et seq.(West Supp. 1979); MASs. GEN. LAWS ANN. ch. 93B, § 12A (West Supp. 1981).
"1 Ohio provides for an option in the damages award. Either double actualdamages are allowed, OHIO REV. CODE ANN. § 4517.65(A) (Page Supp. 1980), or thefair market value of the franchisee's building, machinery and inventory is themeasure, OHIO REV. CODE ANN. § 4517.65(B) (Page Supp. 1980). The choice is up tothe winning franchisee.
'" In this way the parties are returned to the status quo prior to entering therelationship.
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thereunder to equitable relief.16 A permanent injunction restraining themanufacturer from terminating a dealer without cause is also availablein most, if not all, of the states allowing a private damage action. 6'
Injunctive remedies create their own problems. While a dealer maydesire to remain in business rather than live off the damage award,"7
the parties' original relationship founded on mutual trust and good willhas been limited or destroyed by the aborted termination. The manufac-turer, having been reprimanded, will certainly harbor feelings of ill willtoward the dealer. The franchisee-dealer, on the other side, willpresume his conduct is being scrutinized by the parent with an eye tofinding some good cause to terminate. For a court to assume the partiescan carry on business as usual is to ignore the realities inherent in thistype of situation.
Another issue raised by injunctive remedies is the length of time forwhich they remain effective. If they are to be truly "permanent" thenthey must be perpetual, 8 and the contract between the parties wouldbe changed from one with a definite expiration date into a contract foran indefinite term. In effect, a court would be creating a franchise forlife. Courts considering similar problems have arrived at different solu-tions. In Blankenship v. Atlantic Richfield Co.," 9 the court found thatthe defendant had not fully complied with the notice provisions of thestatute,7 ' and held that the franchisor could not terminate thecontract. 7 ' The franchisor was bound to a new three-year contract withthe dealer on the same terms.'
The North Carolina Appeals Court refused to reach such an obviouslyharsh result. In Mazda Motors of America v. Southwestern Motors,Inc., an attempted termination was found to be void as the manufac-turer failed to provide proper notice.' The court held that the franchise
11 E.g., CAL. VEH. CODE. ANN. §§ 3060 et. seq. (West Supp. 1979); NEB. REV.STAT. § 60-1420 (1978).
16 Ohio also provides for a permanent injunction as an election of damages.OHIO REV. CODE ANN. § 4517.65(C) (Page Supp. 1980). Nevada, on the other hand,provides for an automatic stay in addition to a damage award. NEV. REV. STAT.§ 482.36411 (1979).
'17 Semmes Motors, Inc. v. Ford Motor Co., 429 F.2d 1197, 1205 (2d Cir. 1970).11 D. DOBBS, REMEDIES 106 (1973).169 478 F. Supp. 1016 (D. Ore. 1979).110 At issue was the Petroleum Marketing PracticesAct, 15 U.S.C. §§ 2801 et
seq. (West Supp. 1980). The act is similar to the car dealer's acts and serves as auseful analogy. For a more complete discussion of the statute see notes 194-235infra and accompanying text.
'71 478 F. Supp. at 1018.'7I Id. at 1019.171 36 N.C. App. 1, 243 S.E.2d 793 (1978).I" The North Carolina statute, N.C. GEN. STAT. §§ 20-285 et seq. (1978), re-
quires notice to be given to the Commissioner of Motor Vehicles prior to the ef-
agreement remained in effect until notice was perfected, an additionalterm of at least ninety days.'75
No court, in construing a state or the federal automobile dealers'statutes, has considered the equitable remedy of permanent injunctionin this fashion.' But, obviously, both results are possible. The courtsmost likely would continue the contract until some valid cause wasfound by the franchisor, and the board or court or both parties con-sented to the cancellation. This construction would be in harmony withthe statutory stricture allowing termination for cause only.'77
The best approach from a strictly pragmatic view seems to be toeliminate injunctive remedies altogether,' and allow monetaryrecovery only. This view allows prompt adjudication'79 and a fair ap-praisal of each party's rights to the relationship.
The dealership statutes provide for the imposition of criminalpenalties in addition to the private remedies. These penalties can be assevere as fines of $50,000" ° or a one-year jail term for the officers of thecorporation violating the act. 8' As with punitive damages or injunctiveremedies, criminal penalties seem out of place in the contract setting inwhich a franchise relationship is found.
The franchisors have not simply observed their bargaining positionbeing eroded. Pressure has been applied on all fronts. Intense lobbyingefforts by manufacturers were responsible for the toothlessness of thefederal act.'82 This type of statutory scheme has also come under con-stitutional attack from the franchisors. In New Motor Vehicle Board of
fective date of the termination. The manufacturer failed to do this, thus violatingthe act.
'7' 36 N.C. App. at 15, 243 S.E.2d at 803.176 In New Motor Vehicle Bd. of Cal. v. Orrin W. Fox, 439 U.S. 96 (1979), the
court noted that "117 protests have been filed under § 3062 since the Act becameeffective [July 1, 1974].... [O]nly one has been sustained by the Board.... Thus,of 117 automatic temporary injunctions issued by the Board, only one evermatured into a permanent injunction." Id. at 110 n.14. The case alluded to by thecourt is unreported.
,.. CAL. VEH. CODE ANN. § 3060(b) (West Supp. 1979); OHIO REV. CODE ANN.§ 4517.54(A) (Page Supp. 1980); MASS. GEN. LAWS ANN. ch. 93B, § 4(3)(c) (1975).
178 By this it is meant that permanent injunctions would be eliminated.Preliminary injunctions would remain available; in this way the franchisee'ssource of monetary support would not be removed and the status quo would bepreserved until after a hearing on the merits or until a proper violation of thestatute can be proven.
"' The parties would not be constantly returning to court to find out whetherthe latest updating of their situation constitutes cause or not.
"'0 MD. TRANSP. CODE ANN. § 15-212 (1976).,8' HAWAII REV. STAT. § 437-38 (1976).I8 Brown, A Bill of Rights For Auto Dealers, 12 B.C. IND. & COM. L. REV. 758,
791 (1971).
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California v. Orrin W. Fox,"8 3 the Supreme Court found the CaliforniaAct constitutional, but the court's failure to consider the contract clausequestion'8 leaves at least this avenue open in the federal courts.
Several state courts, however, have recently ruled on the contractclause question. Two courts have struck down their state's respectiveversions of the act and two have upheld it.' 5 Thus, no clear trend has ap-peared as of yet, but one can assume that the more liberal judiciarieswill repel the constitutional challenges, keeping the regulatory schemesmore or less intact.'88
To conclude, the auto dealers' acts have served their intended pur-pose. They have eliminated much of the arbitrary self-dealing on thepart of manufacturers and have allowed the dealers a chance to voicetheir complaints to an impartial third party. The price for this reformhas been a staggering increase in litigation. Only when the contract thatunderlies the transaction is changed will the flood of litigation cease.87
As has been mentioned, the statutory attempts are to be lauded fortheir contribution in the remedies area. The penalty is often in touchwith the equities of the auto dealer's situation, even where the trigger-ing event of good cause is not. The results have been mixed. Thosedealers who were genuinely terminated without cause obtained the fullbenefit of the statutory remedies, and those who were cancelled forgood reason received nothing. As such, room for improvement still ex-ists. A survey of the other areas to which legislative efforts have beenapplied shows a similar need for rethinking and reworking.
B. Gasoline Dealers Acts
The gasoline distribution industry's problems are similar in manyrespects to those faced by the automobile dealers. While the stationmanagers remain more or less independent of their suppliers on a dailybasis, the overwhelming size of the oil companies in comparison to the
183 439 U.S. 96 (1979).
'1 In other words, does the statutory remedy scheme remake the parties con-tract in derogation of the contract clause?
11 Georgia Franchise Practices v. Massey-Ferguson, 244 Ga. 800, 262 S.E.2d106 (1979); Yamaha Parts Distributors, Inc. v. Ehrman, 316 So. 2d 557 (Fla. App.1975), The Florida legislature has since reenacted portions of the act. See FLA.STAT. ANN. § 320.641 (West Supp. 1980).
18 Mazda Motors of America v. Southwestern Motors, Inc., 36 N.C. App. 1, 243S.E.2d 793 (1978). See also Excello Wine Co. v. Monsieur Henri Wines, Ltd., 474F. Supp. 203 (S.D. Ohio 1979); Tober Foreign Motors, Inc. v. Reiter Oldsmobile,Inc., 381 N.E.2d 908 (Mass. 1978).
187 This increase in litigation assumes a constant number of terminationscoupled with an increasing awareness of legal rights by the franchisees. Theseassumptions are, however, reasonable. See Brown, A Bill of Rights for AutoDealers, 12 B.C. IND. & COM. L. REV. 758, 785 (1971).
individual station operators means the oil company has the upper handin dictating the terms of the contract between them. '88
One major difference between the franchising of service stations andthe auto dealers has caused the termination problem in the oil industryto go unnoticed until recently.' In the auto industry, the dealer-franchisees own the premises on which they do business; the carmanufacturers license the use of the trademark. In the oil industry, theparent company owns or obtains a long term lease of the site on whichthe station is located, and then leases (or subleases) the station to thefranchisee along with the license to use its trademarks. Thus, the oilcompany is both landlord and grantor of the privilege to use its marks.1 0
This difference caused the service station operator's equity in hisbusiness to go unrecognized.'9'
Originally, the oil companies maintained that the relationship waspurely one of lessor-lessee. This conclusion meant that the oil company,as lessor, retained control of any and all valuables in the site and thetrademark. Gradually, the courts began to recognize that the operatorworked not only for the oil company but also for himself, expecting toget the benefit of any equity developed in the business.'9 2 The gasolinedealers' acts followed a recognition by the judiciary of this equity.'93
1. Petroleum Marketing Practices Act "'
The Petroleum Marketing Practices Act'9 5 was enacted in 1978 to pro-vide gasoline dealers with relief from the same onerous conditionswhich plagued the auto industry and prompted passage of the Dealer'sDay in Court Act.'98 In contrast to the bare bones nature and strict
'" FTC v. Texaco, 393 U.S. 223, 226 (1968). See also Shell Oil Co. v. FTC,360 F.2d 470, 487 (5th Cir.), cert. denied, 385 U.S. 1002 (1966).
189 The Automobile Dealer's Day in Court Act, 15 U.S.C.A. §§ 1221 et seq.(1976), was adopted in 1956; the Petroleum Marketing Practices Act, 15 U.S.C.A.§§ 2801 et seq. (West Supp. 1980), was not enacted until June of 1978.
'9 FTC v. Texaco, 393 U.S. 223, 226-27 (1968)."' See Mobil Oil Corp. v. Rubenfeld, 48 A.D.2d 428, 370 N.Y.S.2d 943 (1975),
reversing the lower court's holding that the oil company-dealer relationship"transcended that of lessor-lessee and was one of franchisor-franchisee." MobilOil Corp. v. Rubenfeld, 72 Misc. 2d 392, 401, 339 N.Y.S.2d 623, 632 (Civ. Ct. 1972).See also H. BROWN, supra note 68, at 86.
9I Atlantic-Richfield Co. v. Razumic, 480 Pa. 366, 390 A.2d 736 (1978).193 The leading case in the area remains Shell Oil Co. v. Marinello, 63 N.J. 402,
307 A.2d 598 (1973), wherein the court held there was an implied convenant ofrenewability in a service station lease and dealer contract absent some showingby the oil company of a failure of the dealer to comply with the terms of the con-tract.
-- 15 U.S.C.A. §§ 2801 et seq. (West Supp. 1980)."95 Id. § 2801.-- 15 U.S.C. §§ 1221 et seq. (1976). Compare [1956] U.S. CODE CONG. & AD.
NEWS 4596, 4596-4605 with [1978] U.S. CODE CONG. & AD. NEWS 873, 875-77.
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burden of proof placed on the franchisee under the Dealer's Act,197 thePetroleum Practices Act makes an honest attempt at balancing theequities of the parties."'
Under the Petroleum Act, termination without cause is strictly for-bidden.'99 The Act also limits cause to five specific situations in the caseof termination prior to the expiration of the contract term,00 and fouradditional causes are provided in the case of a nonrenewal."' The Act is
" See notes 101-10 supra and accompanying text.9 Compare Dealer's Day in Court Act, 15 U.S.C. § 1222 (1976) (giving dealer
cause of action for failure of manufacturer to act in good faith) with PetroleumMarketing Practices Act, 15 U.S.C.A. § 2802 (West Supp. 1980) (sets forth indetail grounds for termination and rights of parties to the contract). See alsoRemarks of Mr. Dingell, H.R. 130, 95th Cong., 1st Sess., 123 CONG. REC. 10383.
' 15 U.S.C.A. § 2802(a) (West Supp. 1980)."' 15 U.S.C.A. § 2802(b)(2) (West Supp. 1980) states in relevant part:(b) (2) For purposes of this subsection, the following are grounds fortermination of a franchise or nonrenewal of a franchise relationship:
(A) A failure by the franchisee to comply with any provision ofthe franchise, which provision is both reasonable and of materialsignificance to the franchise relationship ...(B) A failure by the franchisee to exert good faith efforts to carryout the provisions of the franchise, if-
(i) the franchisee was apprised by the franchisor in writing ofsuch failure and was afforded a reasonable opportunity to exertgood faith efforts to carry out such provisions ...
(D) An agreement in writing, between the franchisor and thefranchisee to terminate the franchise or not to renew the fran-chise ...(E) ... [a] determination made by the franchisor in good faith andin the normal course of business to withdraw from the marketingof motor fuel through retail outlets in the relevant geographicmarket area in which the marketing premises are located, if-
(i) such determination-(I) was made after the date such franchise was entered intoor renewed, and(II) was based upon the occurrence of changes in relevantfacts and circumstances after such date;
(ii) the termination or nonrenewal is not for the purpose ofconverting the premises, which are the subject of the fran-chise, to operation by employees of agents of the franchisorfor such franchisor's own account. ...
"' 15 U.S.C.A. § 2802(b)(3) (West Supp. 1980) states in relevant part:(b) (3) For purposes of this subsection, the following are grounds fornonrenewal of a franchise relationship:
(A) The failure of the franchisor and the franchisee to agree tochanges or additions to the provisions of the franchise, if-
(i) such changes ... [are made] in good faith and in the normalcourse of business; and(ii) such failure is not the result of the franchisor's insistenceupon such changes or additions for the purpose of preventingthe renewal of the franchise relationship.
(B) The receipt of numerous bona fide customer complaints by
essentially a "good cause" statute: Termination is allowed for breach ofcontract,2 ' consent,"'3 withdrawal from the market area by the fran-chisor2" and other occurrences." 5 Nonrenewal upon expiration isauthorized for a good faith failure to agree to new contract terms, 06
failure to cure customer complaints," 7 uncleanliness 0 and certain othergood faith business decisions by the franchisor. 9 Those reasons arebroad enough to encompass virtually every facet of the parties' relation-ship. The subjective good faith test that is used grants to the fran-chisors a great deal of discretion in their citing a cause for termination.In other words, when termination is desired, they can find good cause. 10
In the majority of the recent decisions holding for the dealer, the courtshave relied on the failure of the parent company to comply with thenotice provisions of the statute' rather than the failure to establish
the franchisor concerning the franchisee's operation of themarketing premises, if-
(i) the franchisee was promptly apprised of the existence andnature of such complaints . . . and(ii) ... the franchisee did not promptly take action to cure orcorrect the basis of such complaints.
(C) A failure by the franchisee to operate the marketing premisesin a clean, safe, and heathful manner, if the franchisee failed to doso on two or more previous occasions and the franchisor notifiedthe franchisee of such failures.(D) ... [a) determination made by the franchisor in good faith andin the normal course of business, if-
(i) such determination is-(I) to convert the leased marketing premises to a useother than the sale or distribution of motor fuel,(II) to materially alter, add to, or replace such premises,(III) to sell such premises, or(IV) that renewal of the franchise relationship is likely tobe uneconomical to the franchisor ...
(ii) with respect to a determination referred to in subclause(II) or (IV), such determination is not made for the purpose ofconverting the leased marketing premises to operation byemployees or agents of the franchisor for such franchisor'sown account."
Id.- 15 U.S.C.A. § 2802(b)(2)(A), (B) (West Supp. 1980).203 Id § 2802(b)(2)(D).2' Id. § 2802(b)(2)(E).-5 15 U.S.C.A. § 2802(b)(2)(C) (West Supp. 1980). See note 200 supra.- 15 U.S.C.A. § 2802(b)(3)(A) (West Supp. 1980).
SId. § 2802(b)(3)(B).2 Id § 2802(b)(3)(C).
Id. § 2802(b)(3)(D)."' Munno v. Amoco Oil Co., 488 F. Supp. 1114 (D. Conn. 1980) (200-300% in-
crease in rent not in bad faith); Crown Central Petroleum Corp. v. Waldman, 486F. Supp. 759 (N.D. Pa. 1980) (failure to remain open 24 hours per day, year roundwas good cause to terminate).
21- 15 U.S.C.A. § 2804 (West Supp. 1980).
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good cause." 2 This type of protection falls short of guarding the dealer'slegitimate interest in his business' equity. What is needed is a systemwhich allows termination in all cases, but adjusts the equities of the par-ties upon each termination." '
The statute was enacted to protect the dealer's interest in hisbusiness by statutorily increasing his bargaining strength."4 It aidsgreatly in eliminating the arbitrary, self-serving conduct of the oil com-panies."15 But, as with the automobile dealers' acts, its prohibitions arenot related to the effect which they seek to prevent."6
Requiring cause for termination is not an effective method by whichto protect a party's right to do business. 7 The terminated dealer needsrelief from the effects of the cancellation, not from the parent company'sarbitrariness or malice. Absent some very liberal construction on thepart of the judiciary, this relief will not be forthcoming. The Act allowsterminations, provided they are for good cause, but it does not requirean accounting to the dealer of the equity inherent in the premises." '
The Petroleum Practices Act, by its terms, preempts the area.1 9
Unlike the Automobile Dealer's Act, which allowed the states to developconsistent, parallel remedies,22 the Petroleum Marketing Practices Actis exclusive."I The stated reason for this preemption is to provide auniform rule under which the oil companies can develop consistentregional and national distribution plans.'
The cost for this unified plan has, however, come dearly to the in-dustry as a whole. More than thirty states had developed plans of theirown.223 While some of the states developed rules similar to the federal
212 E.g., Wojciechowski v. Amoco Oil Co., 483 F. Supp. 109 (E.D. Wis. 1980);
Blankenship v. Atlantic-Richfield Co., 478 F. Supp. 1016 (D. Ore. 1979) (failure togive proper statutory notice meant attempted termination was ineffective). Butsee Marini v. Atlantic-Richfield Co., 475 F. Supp. 142 (D.N.J. 1979) (court grantingstay where company pressured dealer to purchase motor oil by raising quotasthen attempted termination when dealer failed to meet new quotas).
213 See notes 152-53 supra and accompanying text.2" H. R. 130, 95th Cong., 1st Sess., 123 CONG. REC. 10378, 10384-88 (1977).215 Id&216 See notes 146-48 supra and accompanying text.217 See generally Gellhorn, Limitations on Contract Terminations -Franchise
Cancellations, 1967 DUKE L.J. 465, 499-505.211 One interesting provision requires the franchisor to apportion any condem-
nation or eminent domain proceeds resulting from loss of business opportunity orgoodwill between the dealer and the licensor. 15 U.S.C.A. § 2802(d)(1) (WestSupp. 1980).
statutes,24 most had developed innovative approaches to the goodwill-dealer equity issue."5 The federal plan substitutes for this in-novativeness relatively little in the way of remedies.
The Petroleum Marketing Practices Act provides for a cause of actionin a federal court to any dealer who has been wronged.226 A preliminarystay is available where the dealer can show that the balance of hard-ships imposed by the termination runs to his favor." Should the dealerlater prove successful in a trial on the merits, the court is empowered toaward both actual and exemplary damages.228 However, absent some ex-tremely harsh misdoings on the part of the franchisor, the dealer willfind his right to do business unprotected. The most recent cases bearthis conclusion out.
In Munno v. Amoco Oil Co.," failure to agree to a 200-300/o rent in-crease was found to be a valid reason not to renew the plaintiff-dealer'slease. The court said the test to be applied to the franchisor's motivewas a "subjective good faith [test], ie., a 'good heart' without evilintent." 3 The court in Pearman v. Texaco23' found that although theproposed changes in the franchise contracts232 would have substantiallyaffected the dealer's chance to make a profit, no question was presentedunder the act unless the changes were not made in good faith with nor-mal business judgment.233 Thus, the dealer is given protection againstlittle more than arbitrary action on the company's part. His power tobargain with the parent oil company has barely increased.
1980); GA. CODE ANN. §§ 106-1101 et seq. (Supp. 1980); HAWAII REV. STAT. § 486H-1(1976); IOWA CODE ANN. §§ 323.1 et seq. (Supp. 1980); LA. REV. STAT. ANN. §§ 51:1451et seq. (West Supp. 1980); MD. CODE ANN. art. 56, §§ 157A et seq. (Supp. 1980);MASS. GEN. LAWS ANN. ch. 93B (1975); PA. STAT. ANN. tit. 73, §§ 202-1 et seq.(Purdon Supp. 1980); UTAH CODE ANN. §§ 13-21-1 et seq. (Supp. 1979). This listdoes not purport to be exhaustive; it is presented as merely a sample of the area.
' See, e.g., HAWAII REV. STAT. § 486H-1 (1976) (franchisor is under duty torepurchase salable dealer inventory regardless of cause of termination); LA. REV.STAT. ANN. § 51:1451 (West Supp. 1980) (franchisee has cause for goodwill lost ifcompany reopens station within one year after termination); MD. CODE. ANN. art.56, § 157A (Supp. 1980) (company operated stations absolutely prohibited as an-ticompetitive); UTAH CODE ANN. § 13-12-1 (Supp. 1979) (dealer's equity is part ofdamages for termination without cause).
- 15 U.S.C.A. § 2805(a) (West Supp. 1980).Id. § 2805(b).
- Id § 2805(d)(1).488 F. Supp. 1114 (D. Conn. 1980).Id at 1120.
21' 480 F. Supp. 767 (W.D. Mo. 1979).12 The franchise contract in question comprised both the station lease and the
dealer contract. Id1 Id at 767, 772.
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The broad scope of circumstances comprising "good cause" that areincluded in the Act234 means that the protective principles embodied inthe statutory remedy will rarely be of use to the terminated dealer. Aswith the automobile dealer's acts,235 the Petroleum Marketing PracticesAct provides protection only to a very limited class of plaintiffs. Theproblem is broader than just termination without cause. The franchisearea needs attention on a unified front. A system must be developedwhich is directed at the industry as a whole, not at one individual seg-ment or facet of the termination problem.
C. General Franchise Legislation
The final class of franchise legislation is general in nature. By itsterms, it is applicable to all licensing agreements in which there is atrademark and a community of interest present between the parties. 36
Several types of legislative actions of this class exist. First are goodcause bills, 3' similar to the automobile and gasoline dealers' acts. Thesecond type deals with the problem from a different perspective;disclosure legislation takes as a precept the view that if all the facts arebefore the party entering the franchise agreement, he will make an in-telligent and fair bargain.2 38 The final type is a hybrid; both disclosureand termination are covered.239
1. General Good Cause Bills
There is no general franchise good cause bill at the federal level, butseveral states have followed this approach to the problem. 4 ° The actscover a broader range of types of businesses,' but in general they ap-proach the termination issue from the same frame of reference as theother types of good cause bills. 42 Thus, the substantive portions of theacts share the same problems as the auto and gas dealers acts.
15 U.S.C.A. § 2802(b)(2), (3) (West Supp. 1980).23 See note 151 supra and accompanying text.
13 HAWAII REV. STAT. §§ 482-1 et seq. (1976); N.J. STAT. ANN. § 56:10-3 (WestSupp. 1980); WASH. REV. CODE ANN. § 19.100.010(4) (1978).
m DEL. CODE ANN. tit. 6, §§ 2551 et seq. (Supp. 1980); N.J. STAT. ANN. §§ 56:10-1et seq. (West Supp. 1980); WIS. STAT. ANN. §§ 135.01 et seq. (West 1974).
2M CAL. CORP. CODE §§ 31000 et seq. (West 1977); MINN. STAT. ANN. §§ 37-5A-1et seq. (1977); VA. CODE §§ 13.1-557 et seq. (1978).
2" HAWAII REV. STAT. §§ 482E-1 et seq. (1976); ILL. ANN. STAT. ch. 1211/2, §§701 et seq. (Smith-Hurd Supp. 1979); WASH. REV. CODE ANN. §§ 19.1-0.010 et seq.(1978).
24 See note 237 supra.241 Compare N.J. STAT. § 56:10-3(a) (West Supp. 1980) with CAL. VEH. CODE
ANN. § 3060 (West Supp. 1979) and Petroleum Marketing Practices Act, 15U.S.C.A. § 2801(a)(A), (B) (West Supp. 1980).
IA Compare N.J. STAT. ANN. § 56:10-5 (West Supp. 1980) with CAL. VEH. CODE§ 3060 (West Supp. 1979), both statutes requiring 60 day notice and good cause.
The Delaware act.. is interesting because of its unusual remedy pro-vision." Under the statute, damages for unjust termination include aportion of the franchisee's fixed assets, goodwill and lost profits equal tofive times the last year of operation's profits. This remedy is a recogni-tion by the Delaware legislature that the franchisee's business includesmore than just unsold inventory. A damage measure of this type takesthe true effect of termination into account. The loss of the right to dobusiness may not be absolutely determinable in monetary terms,245 butit should contain elements such as the fixed assets of the franchise, thedealer's goodwill and the business' earning potential.
The fact that damages under the Delaware act were mandatory andnot necessarily dependent on proof of actual loss by the franchisee raisedconstitutional problems for the statute. The damages-remedy portion ofthe act was held to be violative of the Contracts Clause of the Constitu-tion" ' in Globe Liquor Co. v. Four Roses Distillers Company.247 Thecourt found the damage provision caused a substantial change in therights of the parties under their franchise contract in the nature of apenalty.248 However, it must be noted that a damage provision draftedalong these lines goes far toward recognizing the effect of a franchisecancellation. The remedy becomes truly recissionary, restoring the par-ties to the pre-contract status quo, each having received out of thebargain what he put into it.
2. Disclosure Legislation
Disclosure legislation adopts the view that if a party is apprised ofthe rights and duties of the relationship prior to entering into it, therewill be fewer disputes later. Protection from fraud and misrepresenta-tion are the primary goals of such legislation.4 With these aims, thedisclosure statutes require the franchisor to set out in advance the factssurrounding his business policies. 5 The pure disclosure or registration
14 DEL. CODE ANN. tit. 6, §§ 2551 et seq. (Supp. 1980).24 DEL. CODE ANN. tit. 6, §§ 2553(e) et seq. (Supp. 1980).15 Semmes Motors, Inc. v. Ford Motor Co., 429 F.2d 1197 (2d Cir. 1970).248 U.S. CONST. art. I, § 10, cl. 1." 281 A.2d 19 (Del. Super. Ct.), cert. denied, 404 U.S. 873 (1971).24 Id. at 21. The court's reliance on the mandatory, punitive nature of the
remedy leaves at least some room for speculation that a discretionary remedy ofthe same character would be upheld. "The Law does not require that actual lossbe proven .... The Law is mandatory that upon proof of a termination . . . thedistributor shall recover the statutory damages. Thus it is that the statutorydamages in the absence of any actual loss . . . are in fact punitive." Id. at 24.
24 See generally Chisum, State Regulation of Franchising, 48 WASH. L. REV.291, 299-313 (1973). See also Comment, Franchise Regulation: An Appraisal of Re-cent State Legislation, 13 B.C. INDUS. & COM. L. REV. 529, 538 (1971).
2w E.g., CAL. CORP. CODE §§ 31000 et seq. (West Supp. 1977); WASH REV. CODEANN. §§ 19.100.010 et seq. (1978). The federal version requires registration with
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statutes deal with the before-the-fact problems of the industry and af-ford little protection to the franchisee once his investment has beenmade.25 As such, they are beyond the scope of this discussion.
3. Hybrid Statutes
The integrated hybrid registration-good cause acts25 deal with thefranchisor-franchisee relationship from its inception to its dissolution."5 'Like the disclosure statutes, they require the franchisor to provide theprospective franchisee with information about the franchisor's financialstatus and certain operating policies.
The "hybrids" are also similar to the good cause legislation, definingin broad terms when the franchisor may and may not terminate thefranchisee. The protections they afford the dealers are essentially thesame as those found in other good cause acts discussed earlier."4 Likethe good cause bills that regulate the automobile and service station in-dustries, their emphasis on motive is misplaced. A more broadly basedsystem is needed, which deals with all terminations, not just a smallfraction thereof.
D. Summary of Legislative Efforts
All of the statutory schemes that grapple with the termination-cancellation issue approach it from the same frame of reference. All at-tempt to define a limited set of circumstances in which termination isprohibited. As has been noted, this approach falls short because theclass it protects is so limited.
Under all of the statutory schemes discussed, several problems re-main. Termination is restricted based on motive.5 The manufacturer-
the F.T.C. of all relevant information as well as making mandatory its dissemina-tion to the prospective franchisee. No provision is included which allows theF.T.C. to prosecute violators, however. See 16 C.F.R. § 436 (1979).
251 Compare CAL. CORP. CODE § 31300 (West Supp. 1979) (granting cause fordamages or recission to franchisee harmed due to failure of franchisor to meetstatutory disclosure requirements), with N.J. STAT. ANN. § 56:10-10 (West Supp.1980) (granting civil cause of action for termination of franchise without justcause).
2152 E.g., HAWAII REV. STAT. § 482E (1976); ILL. STAT. ANN. ch. 1211/2, §§ 701 etseq. (Smith-Hurd Supp. 1979); WASH. REV. CODE ANN. § 19.100 (1978).
253WASH. REV. CODE ANN. § 19.100.040 (1978), outlines the required content ofthe disclosure statement. Section 19.100.180 is a description of the statutorily im-posed duties of the parties during the tenure of the relationship. The Washingtonstatute is more fully discussed in Chisum, State Regulation of Franchising, 48WASH. L. REV. 291, 334-90 (1973).
2m E.g. HAWAII REV. STAT. § 482E-6(I), (J) (1976); ILL. ANN. STAT. ch. 1211/2,
franchisor desiring to terminate does so at his peril.2"' His decision issecond-guessed by a court or, under the auto dealers' statutes, by an ad-aiinistrative board.
The positive effects of this availability of review by the judiciary can-not be discounted. The just cause bills remove the threat of arbitrary orcapricious action by the parent company from the relationship. 57 Manyalso provide a remedy which recognizes the very substantial loss whichoccurs upon termination of the franchise."'
This review and remedy should be available to all terminated fran-chisees. The equities in this situation should be adjusted based on theloss to the franchisee, not on the franchisor's motive for termination. Tocontinue the spectrum analogy developed earlier, at one pole lies ter-mination without cause, a case where the equities clearly lie with theterminated dealer. At the other end lies abandonment of the franchiseby the dealer; the equities lie with the licensor. Somewhere in thecenter lies the termination or nonrenewal for cause. It is in this situa-tion that a careful balancing of both parties' contributions to, andwithdrawals from, the relationship is necessary. Good cause or other re-quirements which focus on motive are not the answer.
At least one commentator has suggested imposing a fiduciary duty onthe franchisor as the answer to the termination problem."9 The authorrelied on the element of control as being dispositive of the issue.6 ° Whencontrol is reposed solely in one party, then a fiduciary duty results."'
In the ten years since the article was written, the industry hasmoderated its practices. No longer does the franchisor retain the ex-clusive right to modify or force changes in contracts." 2 Many contractsprovide for the appointment of an impartial arbitrator in the event ofany serious dispute.2 3 Thus, the omnipotent control which may havecharacterized the relationship ten years ago has been somewhat erodedby the intervention of equity. No longer does the franchisor command
I Globe Liquors Co. v. Four Roses Distillers Co., 281 A.2d 19, 21 (Del. Super.Ct.), cert. denied, 404 U.S. 873 (1971).
11 See notes 146-48 supra and accompanying text.2 MASS. GEN. LAWS ANN. ch. 93B, § 4(1) (1975); ILL. ANN. STAT. ch. 1211/2,
Id. at 664.26 Id.262 See sample franchise agreement contained in Bailey, A Form Unit Fran-
chise Agreement, 1980 ARIZ. ST. L.J. 585, 595 (suggesting that both sides begiven the opportunity to modify the terms of the contract).
' Professor Brown himself acknowledges this trend. See H. BROWN, supranote 68, at 83-84, 116-17. See also Monroe, Commercial Arbitration: A Substitutefor Franchise Contract Litigaton?, 26 ARBITRATION J. 147 (1971); Rudnick, Ar-bitration of Disputes Between Franchisors and Franchisees, 55 ILL. B.J. 54(1966).
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complete control over the franchise; it has become a mutual control.264
Yet, there remains the problem of how to end the relationshipamicably. The equities of both parties to the venture must be adjustedin consideration of the contributions of each party during the term ofthe relationship. The answer lies in viewing franchising from a suigeneris approach. The focus must lie on the effect of termination on theparties. From this focus an analytic framework can be drawn whichrecognizes the realities of the franchising concept.
Several recent cases serve to illustrate the need for a sui generis ap-proach to the problem. In Pearman v. Texaco, Inc.,265 the seven-yearfranchise relationship between the parties was terminated due to afailure to agree on an increase in rent. The cancellation was found to befor cause as Texaco acted in the normal course of business and in goodfaith."6 The court denied Pearman an injunction, and Texaco was allow-ed to terminate the lease.2 7 In Tarr v. General Electric Co.,2"8 the defen-dant was allowed to terminate a ten-year dealership allegedly due toTarr's earlier filing of a price-fixing complaint against GeneralElectric.269 The court, in granting a summary judgment for the defen-dant, labelled the action a tort, and then, on freedom of contract prin-ciples, went on to hold the claim was "damnum absque injuria."' " InBlankenship v. Atlantic-Richfield Co.," the oil company attempted ter-mination for failure to cure valid customer complaints. The court heldthat the oil company's departure from the statutory notice provisionsmeant it must renew the dealership for another three-year term.2"2
Statutory schemes which do not provide protection from the loss ofthe basic right to do business, but prohibit a party from validly attemp-ting to withdraw from the contract for just reasons, do not address theproblems. The question of how to deal with franchise terminations is asubject that has received much attention from the commentators, but,as of yet, has inspired little agreement among them.2"' This lack ofagreement, in the author's opinion, leaves room in the area for a new ap-proach.
See notes 300-08 infra.265 480 F. Supp. 767 (W.D. Mo. 1979).2 Id. at 771.17 Id. at 773.26 441 F. Supp. 40 (W.D. Pa. 1977).
" Id. at 41.270 Id. at 42.271 478 F. Supp. 1016 (D. Or. 1979).272 Id. at 1019.
Compare, for example, Brown, Franchising-A Fiduciary Relationship, 49TEX. L. REv. 650 (1971) [hereinafter cited as Brown] with Gelhorn, Limitations onContract Termination Rights -Franchise Cancellations, 1967 DUKE L.J. 465 (theauthor proposed applying the doctrine of unconscionability to the problem).
To this point, this Note has focused on the theories behind the com-mon law as well as the statutory law's approach to franchise termina-tions. Discussion has involved the freedom of contract,"' fiduciary276 andgood faith277 approaches to the areas, as these have been the most wide-ly endorsed.
As previously noted, any theory of franchise terminations must focuson the effect of a franchise termination on the parties, using as itsperspective the realities of the business world in which the franchisorand franchisee operate. Joint venture theory 278 is well tailored for ap-plication in the franchise area.2 7 Its tenets incorporate the in-terdependence of the parties to such a relationship, while at the sametime recognizing the distinct and separate nature of each joint en-trepreneur.
A. Elements of a Joint Venture
A joint venture has been defined as a contractual association amongtwo or more parties who combine their resources to carry out a singlebusiness enterprise for a mutual profit.2 1
8 The association must create acommunity of interest among the joint venturers, each of whom exercis-ing some degree of control over the enterprise.21
The joint venture is quite similar to a partnership.282 It remainsdistinct from a partnership, however, for several reasons very impor-tant to the franchise area. Partnerships, in many states, may not beentered into by a corporation, while a joint venture may be.28 Joint ven-tures need no formal action in order to be dissolved, but a partnership,on the other hand, does. In addition, it has been generally held that joint
274 A substantial portion of the material in this section is drawn from 2WILLISTON ON CONTRACTS §§ 318-20 (3d ed. 1959) [hereinafter cited as WILLISTON].
,, See notes 76-79 supra and accompanying text.276 See notes 79-88 supra and accompanying text.7 See notes 146-49 supra and accompanying text.
278 The terms joint enterprise and joint adventure have been applied inter-changeably in place of joint venture.
29 But see H. BROWN, supra note 68, at 55-56.M WILLISTON, supra note 274, § 318, at 555. For one of the first cases to use
the term "joint adventure," see Clark v. Sidway, 142 U.S. 682 (1892)."' WILLISTON, supra note 274, at 556.t 8 Taubman, What Constitutes a Joint Venture?, 41 CORNELL L.Q. 640, 641-42
(1956); Nichols, Joint Ventures, 36 VA. L. REv. 425, 442-44 (1950) [hereinaftercited as Nichols].
20 WILLISTON, supra note 274, § 318, at 597-602; Nichols, supra note 282, at444-46. That most franchisors are corporations is so obvious a statement it bearslittle more than mention.
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venturers owe to each other the duties of good faith and fair dealing. 284
These duties are the foundation of a franchise relationship."'To constitute a joint venture, all of the following elements must be
present:
1) Each party must contribute property, knowledge, or someother asset to the enterprise;2) There must be a community of interest in the subject of theventure;3) The parties must have a right to mutually control or managethe enterprise;4) The venture must be for profit;5) Each party must participate in the profits;6) The venture must be limited to a single enterprise."'
The actual intent of the parties is determinative. "The acts and con-duct of the parties . . .may speak above the expressed declarations ofthe parties to the contrary.""7 Where the above elements are found tobe present, contractual disclaimers cannot preclude the existence of ajoint venture.288
The application of joint venture theory to the franchise relationship isdesirable for several reaons. Foremost among these is the ease withwhich a joint venture may be dissolved. The dissolution decision may in-volve a breach of contract and consequential damages, but the termina-tion remains effective. 89 Upon dissolution, the parties to the enterprisehave available remedies based both in equity and at law.290 In otherwords, the parties to a joint enterprise may bring an action in breach ofcontract for their proportionate share of the profits or sue in equity tocompel an accounting."
The franchise relationship is a joint venture between the parent andthe licensee. Each outlet or distributorship is a single unique enterprise.The goal of the parties is to develop the market area of the outlet and
M Nichols, supra note 282, at 431.82 See notes 80-81 supra and accompanying text.
28 Nichols, supra note 282, at 433-34 and authorities cited therein. See alsoTaubman, What Constitutes a Joint Venture?, 41 CORNELL L.Q. 640 (1956).
" Simpson v. Richmond Worsted Spinning Co., 128 Me. 22, 145 A. 250, 254(1929). See also Score v. Wilson, 611 P.2d 367 (Utah 1980).
2 WILLISTON, supra note 274, § 318, at 578.Nichols, supra note 282, at 451; Taubman, What Constitutes A Joint Ven-
ture?, 41 CORNELL L.Q. 640, 646 (1956).2" WILLISTON, supra note 274, § 318, at 612-14; Nichols, supra note 282, at
450-53. See also Jaeger, Joint Ventures: Recent Developments, 4 WASHBURN L.J.9, 17 (1964).
2 See, e.g., Parks v. Riverside Ins. Co. of America, 308 F.2d 175 (10th Cir.1962); Miller v. Walser, 42 Nev. 497, 181 P. 437 (1919).
promote the franchisor's product. Each derives a distinct benefit fromthe venture: the parent in the form of royalties and the increase in thegoodwill of its trademark,292 and the franchisee in its profits and localgoodwill it develops. A closer examination of the elements of a joint ven-ture will sustain this conclusion.
1. Each Party Must Contribute Property, Knowledgeor Some Other Asset to the Enterprise
In a franchise, the foundation of the relationship is a joint contribu-tion by the parties. The franchisor invests his business knowledge andskill by training the franchisee. The franchisee is called on to makesubstantial commitments to the enterprise in the form of start-upcapital. In addition, once trained by the parent, the franchisee often isrequired to contribute his labor at the beginning of the operation. -3 Ithas been generally held that the relative size or character of eachparty's contribution is immaterial to the question of whether a jointventure has been created; the property must simply have been con-tributed in order to promote the ends of the enterprise. 4
2. There Must Be a Community of Interest in theSubject of the Undertaking
A community of interest is present in the franchise situation. The con-tinuing relationship between the parties provides this element. For ex-ample, the parties generally agree to share advertising expenses infurtherance of the venture." They also share in many of the managerialtasks involved in the operation, the franchisor undertaking those whichcan be best accomplished on a national scale, such as bookkeeping orpurchasing, and the franchisee attending to the tasks best suited forlocal treatment (e.g., hiring, firing and payroll). 6
Many of the good cause acts already examined include a verbatimrecitation of community of interest as an element of the statutory defini-tion of franchising. 97 This merely lends further credence to the exist-ence of this element of joint ventures in franchising.
In considering this requirement, a leading case has defined this termas "a mixture of identity of interest in a venture in which each and all
2 Lightman, Economic Aspects of Trademarks in Franchising, 14 IDEA 481,488-91 (1970). See also Brown and Cohen, Franchise Misuse, 48 NOTRE DAME
LAW. 1145, 1160-61 (1973) [hereinafter cited as Franchise Misuse]." The commitments of both parties in a franchise is more fully discussed in
the text accompanying notes 15-17 supra.MJB Investments v. Coxwell, 611 P.2d 438 (Wyo. 1980).See sample franchise agreements contained in Bailey, supra note 68.
2H Id.
29 E.g. MASS. GEN. LAWS ANN. ch. 93B, § 1(i) (1975); N.H. REV. STAT. ANN.§ 357-B:1(IX) (Supp. 1979).
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are reciprocally concerned and from which each and all derive amaterial benefit and sustain a mutual responsibility.""0 That franchisor-franchisees are reciprocally concerned with the business becomes evi-dent when the third element, right to control, is considered. Both par-ties enjoy benefits from the contract in the form of profits and the ac-companying increase in goodwill that flows from a successfuloperation. 9 In sum, the several interests of the parties in an individualoutlet become commingled with time, thus creating the necessary com-munity of interest.
3. The Parties Must Have a Right to MutuallyControl or Manage the Enterprise
The right of each party to control or manage the venture is an impor-tant feature of a joint enterprise. The control need not be exercisedequally in the day to day performance of the operation; it may bedelegated to one of the parties."° The joint venturers each must,however, have the right to control the enterprise." 1
The control that the parties exercise over the individual franchiseoutlet is generally delegated to the franchisee. He is responsible for see-ing that the doors open every day or that the salesmen make theirrounds. He is vested with the responsibility of making a profit for theventure.
The franchisor also possesses a right to control the operation. Mostoften this right is reflected in the quality control requirements attachedto the trademark. 2 In addition, when the contract provides that themanual of operation may be changed, this gives the franchisor the rightto control.3
The right to control becomes mutual when the parent's powers areexamined in light of the recent antitrust decisions against the fran-chisors. The parent cannot unilaterally dictate the product mix ' or the
Carboneau v. Peterson, 1 Wash. 2d 347, 95 P.2d 1043, 1055 (1939). See alsoSasportes v. M/V Sol de Copacabana, 581 F.2d 1204 (5th Cir. 1978); Gwynn v. Cor-pus Christi Bank & Trust, 589 S.W.2d 764 (Tex. Civ. App. 1979).
Franchise Misuse, supra note 292, at 1161.' House v. Mine Safety Appliances Co., 573 F.2d 609 (9th Cir. 1978); Murphy
v. Redland, 178 Mont. 296, 583 P.2d 1049 (1978); See also WILLISTON, supra note274, § 318A, at 570; Nichols, supra note 282, at 439.
301 House v. Mine Safety Appliance Co., 573 F.2d 609 (9th Cir. 1978); Delgado v.Lohmar, 289 N.W.2d 479 (Minn. 1979); Edwards v. Northwestern Bank, 39 N.C.App. 261, 250 S.E.2d 651 (1979).
002 Collison, Trademarks- The Cornerstone of a Franchise System, 24 Sw. L.J.247, 253-58 (1970). See also Brown, supra note 273, at 665.
See sample franchise agreement in Bailey, supra note 68.Full line forcing, as this practice is more popularly called, was held to be a
violation of the Sherman Anti-Trust Act, 15 U.S.C. §§ 1-7 (1976), in Times-Picayune Publishing Co. v. United States, 345 U.S. 594 (1952).
prices that must be charged.115 Both parties generally collaborate inthese areas to reach mutually satisfactory ends.
The franchisor may, under the Lanham Act,306 reserve the right toenter and manage the outlet in conformity with guidelines necessary topreserve the trademark. Yet this right is primarily for the benefit of theenterprise, as loss of the trademark is fatal to the system as a whole.
The standard franchise contract itself has been redrawn to reflectthis mutuality of control. 7 Both parties commonly make the necessarychanges needed to determine the direction of the business. It is thisright to control for the benefit of the enterprise that is the substance ofthe mutuality of control test embodied in joint venture principles. 8
4. The Venture Must Be for Profit
The "for profit" requirement is generally thought to be an indispen-sable element of a joint venture as the right to control. 9 The expecta-tion of a monetary profit is the predominant purpose for entering a fran-chise relationship.310 The franchisor typically takes his profit off the topin the form of a franchise royalty or license fee." The franchiseerealizes profit as salary or net income of the business.
There is, however, an additional profit element available to both inthe form of goodwill developed by the business. This goodwill isdeveloped on two levels: The outlet's success creates a goodwill in-herent in the local site, and also contributes to the goodwill inherent inthe trademark product or service. '2 Each of these two independently ac-
300 In United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967), the Courtheld that the seller-franchisor has no power over the goods once they leave itspossession. The franchisor may, however, suggest retail prices for its goods pro-vided it does not force adherence to such prices. Santa Clara Valley DistributingCo. v. Pabst Brewing Co., 556 F.2d 942 (9th Cir. 1977); Siegal v. Chicken Delight,Inc., 311 F. Supp. 874 (N.D. Cal. 1970).
15 U.S.C. §§ 1055 et seq. (1976).Compare H. KURSH, THE FRANCHISE BOOM 384-415 (2d ed. 1968) (reserving
almost unilateral control to franchisor) with Bailey, supra note 68 (providing bothparties with an opportunity to vary contract).
"8 William McCrindle & Sons, Ltd. v. Durant, 611 F.2d 89 (5th Cir. 1980);Sasportes v. M/V Sol de Copacabana, 581 F.2d 1204 (5th Cir. 1978).
" See WILLISTON, supra note 274, § 318A, at 570-77; Nichols, supra note 282at 436-38. Courts have often drawn the line between joint enterprise and jointventure based on this criterion. Ventures contain the profit element while enter-prises are most often for pleasure. Compare Hanlon v. Melfi, 102 Misc. 2d 170,423 N.Y.S.2d 132 (1979) (alleging joint venture) with Delgado v. Lohmar, 289N.W.2d 479 (Minn. 1979) (finding joint enterprise). See also note 278 supra.
310 See sample franchise inducement advertisement detailed at note 17 supra.311 See Bailey, supra note 68, at 600-01 (detailing franchise fee and royalty pay-
ment clauses). See also H. BROWN, supra note 68, at 378-81.1I This form of goodwill is generally reflected in the value of the trademark.
In fact, until the mark is used and made known it is not protected by the
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crued goodwill accounts 13 is a source of potential profit to the ven-turers. The goodwill that develops in the site or local goodwill is realizedwhen the business is sold. The goodwill inherent in the trademark isreflected in the increased price that the franchisor receives for licensingits use."1 ' Both of these sources, ie., the profit on resales and the good-will of the business, are profit sources to the venture.
5. Both Parties Must Participate in the Profits
A realization that a franchise relationship meets this requirementshould flow from the discussion immediately above. The franchisorreceives two contributions of profit from the successful local operation.For its services (managing and advertising the venture), it gets a royaltyin the form of a percentage of gross sales or a per-unit-sold fee. 15 In ad-dition, when the system as a whole matures and becomes successful, theparent draws a profit by virtue of the increased price its trademarklicense commands.
3 1 6
The franchisee, for its part, should receive a periodic profit and an ac-crued profit also. Its periodic profit is represented by the yearly salarywhich is drawn out of the business or the profit it retains from the saleof the trademarked goods or services. The accrued profit is the so-called"sweat equity" ' 7 which it invests in the local site.
This element of joint ventures has also been held to include participa-
trademark laws. Lanham Act, 15 U.S.C. §§ 1051-1127 (1976); Trademark Cases,100 U.S. 82 (1879). See also Collison, Trademarks- The Cornerstone of a Fran-chise System, 24 Sw. L.J. 247, 248 (1970).
This trademark goodwill may be difficult to conceptualize. The trademarkitself is an intangible asset of the business. R. WIXON, W. KELL, & N. BEDFORD,
ACCOUNTANT'S HANDBOOK § 19-1 (5th ed. 1970). After its development it should berecorded as an asset at its development cost. Id. at § 19-12. As the customerdevelops a preference for the goods or services that are the subject of the mark(or where several marks are licensed at once, the license), the mark becomessusceptible to independent valuation. This difference between the mark'shistoric, or development cost and its current sale price can be referred to as thetrademark goodwill. Lightman, Economic Aspects of Trademarks in Franchising,14 IDEA 481, 488-91 (1970). This increase in the mark's value, however, will neverappear on the parent-franchisor books because the trademark must be carried atits development or acquisition cost. Accounting Principles Board, Opinion No. 17,Intangible Assets 28 (1970).
313 Good accounting dictates the recognition of goodwill only when a realiza-tion event has occurred, such as the sale of the business. Even then it is only aresidual value, the difference between the price paid for the business and thebook or cost value of the assets. Accounting Principles Board, Opinion No. 17, In-tangible Assets 26 (1970). See also Accounting Principles Board, Opinion No. 16,Business Combinations 187 (1970).
31' Lightman, Economic Aspects of Trademarks in Franchising, 14 IDEA 481,488-91 (1970).
311 See generally note 311 supra.316 See generally note 312 supra.317 See H. BROWN, supra note 68, at 39, 67.
tion of the parties in any losses that might beset the enterprise.18 Mostillustrative of this feature in franchising is the tort area, where both theparent and the local licensee are routinely held jointly liable for thetorts of the enterprise." 9
Both parties imply this participation in the losses of the venture in ageneral way also. If, for example, the outlet should fail, the franchiseewould lose the capital he had invested and the franchisor would lose hiscontribution of time devoted to the start up of the business.
6. The Venture is Limited to a Single Enterprise
This requirement has most often been used to distinguish a joint ven-ture from a partnership.2" The commentators, after stating this to be anecessary feature of joint ventures, go on to state that the distinctionmakes for a poorly-defined line at best. 2' The courts have recently con-sidered the single enterprise question and have likewise announced thedistinction, and then found many continuing businesses to be singleenterprises.2 2 The single enterprise criterion of joint ventures has,therefore, been more formal than real.
The franchise concept fits well within this description. It is for a fixedterm, subject to renewal by the parties' mutual agreement. It is a"single enterprise" in that the parties do not contemplate an expandingintergrated operation.2 3 Rather, the relationship is confined to a specificarea, the dealings are in a single type or "line" of goods and the partiesview it as so limited.
318 WILLISTON, supra note 274, § 318A, at 573-76; Nichols, supra note 282, at436-38; Bank of St. Louis v. Morrissey, 442 F. Supp. 527 (E.D. Mo. 1978), aff'd, 597F.2d 1131 (1979); Institutional Management Corp. v. Translation Systems, Inc.,456 F. Supp. 661 (D. Md. 1978); Producer's Livestock Marketing Ass'n v.Christensen, 588 P.2d 156 (Utah 1978).
319 Germain, Tort Liability of Trademark Licensors in an Era of Accountability:A Tale of Three Cases, 69 TRADEMARK REP. 128 (1977).
320 WILLISTON, supra note 274, § 318B, at 596; Nichols, supra note 282, at 449.See also Mechem, The Law of Joint Adventures, 15 Miss. L. REV 644, 659 (1930).
121 "Perhaps the best that can be said is that 'single' ... is largely a question ofdegree." WILLISTON, supra note 274, § 318B, at 594-95. "It is too plain for argu-ment that joint adventures often require a much more extensive course of com-mercial dealings than some partnerships." Mechem, The Law of Joint Adven-tures, 15 MISS. L. REV. 644, 659 (1930). See also Nichols, supra note 282, at 440.
' Aigner v. Bell Helicopters, Inc., 86 F.R.D. 532 (N.D. Ill. 1980) (heli-skiingoperation held to constitute joint venture); Modern Air Conditioning, Inc. v.Cinderella Homes, Inc., 226 Kan. 70, 596 P.2d 816 (1979) (real estate agent's andconstruction company's agreement to buy land, build homes, and later sell themfound to be a joint venture); Hanlon v. Melfi, 102 Misc. 2d 170, 423 N.Y.S.2d 132(Sup. Ct. 1979) (operation of wholesale and retail produce store found to be a jointventure); Engelke v. Crawford, 581 S.W.2d 217 (Tex. Civ. App. 1979) (agreementto construct building and operate store therein was joint venture contract).
'2 See Bailey, supra note 68, at 587-91.
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In sum, the franchisor-franchisee relationship can be realisticallyviewed as a joint venture. It is conceded that franchising is not a tradi-tional area in which the theory has been applied; 2 ' however, the diversityof endeavors and operations to which the theory has been adapted3 2
1
leads this commentator to believe that franchising could be well servedby its tenets.
The franchise relationship involves a contribution from all involved. Itcreates a community of interest in the subject of the franchise. The par-ties each possess the right to direct the course of the enterprise. It is"for profit" with both parties realizing a share of the profits. Finally,franchising is confined to a single enterprise. These have been the con-sistently announced criteria by which the joint venture has beenjudged3 2 and this Note has attempted to mark their application to thefranchise concept.
What follows is an examination of the principles of termination injoint ventures and comparison to the termination decision in franchising.Performance, abandonment, recission and mutual agreement are amongthe methods by which a joint venture relationship may be concluded.3"
B. Franchise Termination in a Joint Venture Light
Joint venturers, unlike partners, have available both legal andequitable remedies.328 This is in harmony with the development ofstatutory remedies in the franchise field.129 The difference lies in thefact that the joint venturers' rights in equity are limited to an account-ing,"' while under many franchising statutes, injunctive relief is the soleequitable remedy. 1
The equitable remedy of an accounting speaks more clearly to therealities of a termination situation than does injunctive relief. Aspreviously noted,332 once the decision to end the relationship has been
I2 "The joint venture has been used for a great variety of undertakings ...[and] a most prevalent type deals with land, options for the purchase thereof, andthe mineral rights therein or thereunder." WILLISON, supra note 274, § 319, at631-32. "[P]robably the most common of all joint ventures and the ones most fre-quently encountered in litigation involve the discovery, exploitation and develop-ment of mineral resources, such as coal, oil, and gas." Id at 634-36.
2 Joint ventures have been held to exist in farming operations, mining ven-tures, construction projects and in general to the management of nearly any typeof business. See WILLISTON, supra note 274, § 319, at 631-36.
" See notes 280-88 supra and accompanying text.SWILLISTON, supra note 274, § 319C, at 646.
8 Id at 647-48. See also Nichols, supra note 282, at 450-53.See notes 156-81 supra and accompanying text.
o WILLISTON, supra note 274, § 319C, at 647-48; Nichols, supra note 282, at450-52.
13 E.g., CAL. VEH. CODE ANN. § 3067 (West Supp. 1979); NEB. REV. STAT.
§ 60-1420 (Supp. 1979).1 See notes 167-77 supra and accompanying text.
made, the mutual trust and good faith which form the basis of a fran-chise disappear. The court, if it is to enjoin the termination, must thenmonitor the continuing performance of both parties to insure this goodfaith.3
On the other hand, once an action for an accounting has been com-pleted, the court's role is over. The relationship is ended, and each partyreceives its fair share and is free to enter other contracts or other ven-tures. This remedy is more in harmony with the realities of the fran-chise system. No attempt is made to force the parties into a franchisefor life. Either side may decide to quit the relationship and, provided theprofits are fairly split, may move on. The relationship is terminated fair-ly. With an accounting as the remedy, freedom of contract is preserved.At the same time, each party receives a fair reward for his performance.
C. An Equitable Remedy for all Terminations
The measure of damages in equitable accounting is a share of profitsfrom the venture proportionate to the contribution made by the party.3"In the franchise situation, the elements available to both parties as pro-fit would include several items. The net profit of the outlet is the largestof the items: This should include both the franchisee's and the fran-chisor's shares of profit. The salary drawn by the individual operator aswell as the franchise or license royalties should be considered a part ofthe profit. 15 The goodwill from the operation should also be equitablydistributed. The local goodwill inherent in the site and the local outlet'scontribution to the goodwill in the trademark should be proportionatelydistributed." 6
The local goodwill element has been accepted as an element of ter-mination damages by a far greater number of courts and legislators. 7
' The effect of this monitoring role of the court is to remove the impartialityof the judge. In other words, he must decide the case and then examine the par-ties' subsequent performance continually in order to insure compliance with thejudgment decree. Requiring courts to exercise these extrajudicial powers of en-forcement has been criticized as beyond the powers of the judiciary in Chayes,The Role of the Judge in Public Law Litigation, 89 HARV. L. REV. 1281, 1302(1976).
33 WILLISTON, supra note 274, § 319C, at 648.See notes 309-11 supra and accompanying text.See notes 311-14 supra and accompanying text.Many legislatures have expressly included the local goodwill element as a
part of the damage measure. See, e.g., DEL. CODE ANN. tit. 6, § 2553(c)(2) (1974);HAWAII REV. STAT. § 482E-6(3) (1976). The Petroleum Marketing Practices Act,15 U.S.C.A. § 2803(d)(1) (West Supp. 1980), mandates ratably apportioning thegoodwill element in any eminent domain condemnation award between the fran-chisor and the franchisee.
Several courts have reached this result, namely, upon termination the fran-chisee must be paid for the goodwill he has developed in the business. See, e.g.,Westfield Centre Service, Inc. v. Cities Service Oil Co., 158 N.J. Super. 455, 386A.2d 448, supp. on other grounds, 162 N.J. Super. 114, 392 A.2d 243 (1978).
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While goodwill is an intangible asset, it is relatively easy to measure.Goodwill represents the difference between the fair market value of theoutlet's tangible assets and the outlet's value as a going business. 8
These figures can be appraised with a good degree of accuracy. Oncecomputed, this element should be added to the profit pool.
The final element of profit from the relationship is the trademark'sgoodwill. 3 Its value is not as easy to ascertain but several methods areavailable. The value of the privilege of doing business under the mark isapproximated by the initial franchise fee currently being paid for newfranchises.34 This value could be compared to the price the franchiseeactually paid at the inception of the relationship and a rough estimate ofthe increase in goodwill would be found.
An alternate method would be to appraise the value of the franchisor'sbusiness goodwill in a manner similar to that used for the local goodwillelement. This figure could then be apportioned to the individual fran-chisee through a formula based on contribution to gross sales or net pro-fits. 4 '
The next step would be to sum the four elements and ratably appor-tion them based on the relative contribution of the parties to the rela-tionship throughout its term. It is conceded that many hard questionsremain unsolved, such as, at what basis the contribution element is to bemeasured. However, if the relationship was reduced to an arithmeticform, the results of the operation would more clearly present them-selves. Each party would then receive the benefit of its work and inputinto the venture.
The joint venture dissolution method should be applied to franchiseterminations. Its application is meant to go beyond the "bad faith" casesmentioned earlier and be more universally used, even where cause ex-ists for termination. The procedures for dividing the "profits" detailedherein provide an accurate measure of the parties' contribution evenwhere a once-successful franchise is cancelled for its recent failings. Theformulas account for the parties' contributions over time, which is theheart of a continuing relationship such as franchising.
3m R. WIXON, W. KELL & N. BEDFORD, ACCOUNTANT'S HANDBOOK §§ 19-1,19-14, 19-15 (5th ed. 1970).
3 It should be noted that by "trademark goodwill" what is meant is the fran-chisee's undivided share in the goodwill that the system as a whole has developedin the franchisor's mark. See Lightman, Economic Aspects of Trademark in Fran-chising, 14 IDEA 481, 491 (1970).
340 See Franchise Misuse, supra note 292, at 1145, 1161.31 It is not the aim of this Note to arrive at an exact figure for each of the sug-
gested elements of the profit pool. An effort is simply being made to provide aframework within which each element can be viewed.
The dynamic nature of franchising has not gone unrecognized byeither the commentators or the judiciary. However, the approachesfollowed have not been consistent with the realities of the subjectsystem. The courts have found themselves constrained by the purelycontractual appearance of franchising.
In their attempts to find easy solutions, the legislatures haverestricted their efforts to the most obvious problem of the industry, in-correctly focusing on motive rather than on effect.
What has been presented is a sui generis approach to the problem. Itis tecognized that even the application of this approach by the judiciaryor legislatures will do little to reduce the onslaught of litigation whichhas been seen in recent years. Only if the franchisors include such for-mulas in their contracts will the problem subside. Then the need forlitigation will disappear. The parties will then have received the realbenefit of their bargain.
